New South Wales Supreme Court CITATION : Mobile Innovations Limited v Vodafone Pacific Limited & Ors [2003] NSWSC 166 HEARING DATE(S) : 17/02/03, 18/02/03, 19/02/03, 21/02/03, 24/02/03, 25/02/03, 26/02/03, 27/02/03, 28/02/03, 3/03/03, 4/03/03, 5/03/03, 6/03/03, 7/03/03, 10/03/03, 11/03/03, 12/03/03, 13/03/03, 14/03/03 JUDGMENT DATE : 27 March 2003 JURISDICTION: Equity Division JUDGMENT OF : Einstein J DECISION : Upon the proper construction of the ASP Vodafone was not entitled to put forward nil as the target level in respect of the number of connections of new subscribers. By setting a nil target or by refusing to determine a target Vodafone rendered it impossible for Mobile to perform its obligations under the ASP. Finding that the same decision may be reached by way of: (1) upholding the pleaded implied co-operation term obliging Vodafone to do whatever was necessary to be done on its part to enable Mobile to have the benefit of the ASP and to refrain from doing anything which would or which would be calculated to deprive Mobile of the benefit of the ASP but giving this term limited reach in terms of applicable content (2) upholding the pleaded implied terms that Vodafone would act in good faith and reasonably in exercising its powers under the ASP but giving this term limited reach in terms of applicable content. Other disparate cases dealt with. Parties to bring in short minutes of order. CATCHWORDS : CONTRACT - Principles of construction - Inter- relationship with principles governing implication of terms - IMPLIED TERMS - Duty to co-operate - Duty to act in good faith - Duty to act reasonably - Whether duty of co-operation may be considered an implied legal duty discerned by a process of construction, a rule of law or an implied term - Principles governing implication of term in connection with the maintenance of a business - Principles governing exclusion of implied terms - CAUSATION AND DAMAGES - Difficulties of assessment - Hypotheticals - Lost Chance - Loss of benefit or detriment dependent upon the making or exercise of discretionary decisions - Doctrine of efficient breach - Vicissitudes - Contractual and other arrangements of parties carrying on business of providing mobile telecommunications services - [see extended catchwords within] LEGISLATION CITED : Supreme Court Act Telecommunications Act 1997 (Cth) Mobile Innovations Limited (Plaintiff) PARTIES : Vodafone Pacific Limited (First Defendant) Vodafone Network Pty Limited (Second Defendant) Vodafone Pty Limited (Third Defendant) FILE NUMBER(S) : SC 50123/01 COUNSEL : Mr D J Hammerschlag SC, Mr V F Kerr (Plaintiff) Mr T F Bathurst QC, Mr T D Castle (Defendants) SOLICITORS : Deacons (Plaintiff) Henry Davis York (Defendants) Extended Catchwords Long-term commercial contract appointing plaintiff as non-exclusive agent service provider for provision of acquisition and management services Contract including close provisions with respect to parties obligations to use best endeavours to agree upon business plans prior to commencement of each quarter - Provision that defendant to have sole discretion to determine target level in respect of the number of connections of new subscribers which target level is to be determined by defendant in conjunction with the determination of business plan for relevant quarter - Whether discretion to set targets absolute or subject to implied terms to co-operate, to act in good faith and/or to act reasonably Defendant purports to determine "nil" target Defendant refuses to determine targets Whether nil is "the number of new subscribers expected to be connected in the next quarter" Whether defendant entitled to put forward nil as the target level in respect of the number of connections of new subscribers - Alleged co-operation term that defendant would do whatever was necessary to be done on its part to enable plaintiff to have the benefit of the contract and would refrain from doing anything which would or which would be calculated to deprive plaintiff of the benefit of the contract Precise content of such implied term - Obligation of good faith and reasonableness obliges each party to behave honestly and to do all such things as are necessary to enable the other party to have the benefit of the contract - Whether implied obligation would be breached if discretions exercised arbitrarily or capriciously - Court does not require commercial parties to behave reasonably towards each other in the matter of fixing positive as opposed to nil targets when they have not expressly included the relevant standard Court not in a position to clarify that which is irremediably obscure Review of principles to be derived from case law with respect to implication of a term in connection with maintenance of a business Exclusion of implied terms Principles applicable Setting target of nil effectively stultified further operation of contract Damages for loss of benefit of chance contracted for Courts assessment of prospects of success or loss had opportunity been pursued Doctrine of efficient breach Questions of causation to be answered in the legal framework in which they arise Review of case law in terms of inability of curial procedures to determine with certainty what has happened in the past Loss or benefit or detriment dependent upon the making or exercise of discretionary decisions Review of case law concerning discounts for vicissitudes List of Cases Abu Dhabi National Tanker Co v Product Star Shipping Limited (The Product Star) (No 2) [1993] 1 Lloyd's Rep 397 Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236 Ajayi v RT Briscoe (Nigeria) Ltd [1964] 1 WLR 1326 Alcatel Australia Ltd v Scarcella & Ors (1998) 44 NSWLR 349 Alexander v Cambridge Credit (1987) 9 NSWLR 310 Alpha Trading Ltd v Dunshaw-Patten Ltd [1981] 2 WLR 169 Ashington Piggeries v Christopher Hill [1972] AC 441 Australian Broadcasting Commission v Australian Performing Right Association (1972) 129 CLR 99 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Australis Media Holdings v Telstra Corporation (1998) 43 NSWLR 104 Beaton v McDivitt (1987) 13 NSWLR 162 Bennett v Minister for Community Welfare (1992) 176 CLR 486 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 B&M Readers' Service v Anglo Canadian Publishers Pty Limited [1950] Ontario Reports 159 (Court of Appeal); Board of Fire Commissioners (NSW) v Ardouin (1961) 109 CLR 105 BP Refinery (Westernport Port) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 Byrne v Australian Airlines (1995) 185 CLR 411 Castlemaine Tooheys Ltd v Carlton and United Breweries Ltd (1987) 10 NSWLR 468 Chaplin v Hicks [1911] 2 KB 786 Chappel v Hart (1998) 195 CLR 232 Coal Cliff Collieries v Sijehama Pty Ltd (1991) 24 NSWLR 1 Cockburn v Alexander (1848) 6 CB 791 Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Commonwealth v Amann Aviation (1991) 174 CLR 125 Comptoir Commercial Anversois and Power Son and Co [1920] 1 KB Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurances (Australia Ltd) (1986) 160 CLR 226 Coulter v Readhead (1931) 31 SR 432 Daniels v Anderson (1995) 37 NSWLR 438 Davis Contractors Ltd v Fareham UDC [1956] AC 696 Eastern Extension Australasia and China Telegraph Co Ltd v The Commonwealth (1908) 6 CLR 647 Evans Marshall and Co Ltd v Bertola SA [1975] 2 Lloyd's Rep 373 Fightvision Pty Limited v Onisforou (1999) 47 NSWLR 473 Fink v Fink (1946) 74 CLR 127 Gissing v Gissing [1971] AC 886 Hamlyn & Co v Wood & Co [1891] 2 QB 488 Hardwick Game Farm v Suffolk Agricultural Poultry and Producers Association [1969] 2 AC 31 Hart v Macdonald [1910] CLR 417 Heimann v Commonwealth (1938) 38 SR (NSW) 691 Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Howe v Teefy (1927) 27 SR (NSW) 301 Hughes Bros Pty Ltd v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91 Hungry Jacks v Burger King [1999] NSWSC 1029 Immer (No. 145) Pty Ltd v. Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 Inchbald v Neilgherry Coffee Tea and Cinchona Plantation Co (Ltd) (1864) 17 CB (NS) 733; 144 ER 293 Jones v Schiffmann (1971) 124 CLR 303 Johnson v Agnew [1980] AC 367 Kahn v Aircraft Industries Corporation [1937] 3 All ER 476 Kofi-Sunkersette Obu v A Strauss & Co Ltd [1951] AC 243 Krell v Henry (1983) 2 KB 740 Lavarack v Woods Colchester Ltd [1967] 1 QB 278 Lazarus v Cairn Line of Steamships Ltd (1918) 106 TLR 378 L French and Co Ltd v Leeston Shipping Co Ltd [1922] AC 451 Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 Mackay v Dick (1881) 6 App Cas 251 Mallett v McMonagle [1970] AC 166 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170 March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 McCutcheon v David MacBrayne [1964] 1 WLR 125 McIntyre v Belcher (1863) 11 BC (NS) 654; LJ (CP) 254 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Meehan v Jones (1982) 149 CLR 571 Monarch SS Co v A/B Karshamns Oljefabriker [1949] AC 196 Neeta v Philips (1974) 131 CLR 286 New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68 Norris v Blake [No 2] (1997) 41 NSWLR 49 Northey v Trevillion (1901) 18 TLR 648 Ogdens, Limited v Nelson [1905] AC 109 Oriental Steamship Co v Tylor (1893) 2 KB Overlook v Foxtel [2002] NSWSC 17 Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 Ratcliffe v Evans [1892] 2 QB 524 RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417 re English and Scottish Marine Insurance Company; Ex parte Maclure (1870) L Rep 5 Ch 737 Reigate v Union Manufacturing Co (Ramsbottom) [1918] 1 KB 592 Reid v Rush Tompkins Group Plc [1990] 1 WLR 212 Re Premier Products Ltd (in liq) [1965] NZLR 50 re Railway and Electric Appliances Company (1888) 28 ChD 597 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Rhodes v Forwood (1876) 1 App Cas 256 Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver and Manager Appointed (formerly CEL Home Video Pty Ltd) (1997) 42 NSWLR 462 Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 Sargent v. ASL Developments Ltd (1974) 131 CLR 634 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 (2002) State of New South Wales v Banabelle Electrical Pty Ltd 54 NSWLR 503 Secured Income Real Estate v St Martin's Investments Pty Ltd (1979) 144 CLR 596 Sterling v Maitland (1864) 5 B & S 840, 122 ER 1043 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 Takaro Properties Limited v Rowling [1986] 1 NZLR 22 Taylor v Caldwell (1863) 3 B&S 826; 122 ER 309 TCN Channel 9 v Mayden Enterprises (1989) 16 NSWLR 130 Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 Turner v Goldsmith [1891] QB 544 Tymshare Inc v Covell 727 F2d 1145 (1984) United States Surgical Cooperation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Warren & Co v Agdeshman (1922) TLR 588 Wenham v Ella (1972) 127 CLR 454 Withers v General Theatre Corporation [1933] 2 KB 536 INDEX Paragraph No. The Proceedings 1 The parties 3 Ownership and transfer of the Network 5 The Agreements 10 GSM Service Provider Agreements - 13 May 1994; 7 November 1996 10 Structural changes to the relationship 12 Heads of Agreement 13 ASP Agreement - October 1998 14 First Amendment Agreement - May 1999 18 Novation/Parties to the ASP Agreement as at the date of the May 1999 Amendment Agreement 20 Second Amendment Agreement - August 2000 23 Glossary 25 General nature of issues for determination 26 Implied Terms 31 Overview of the ASP Agreement 35 The nil determination issue 42 Statistics 49 Identification of the eleven disparate cases 50 MC 9 Plan [Claim 3] 58 Mobile's Case 65 Vodafone's case 66 Additional Customer Management Agreement [Claim 1] 70 Website Agreement [Claim 11] 76 June 2001 Quarter [Claim 4] 81 Vodafone's case 83 September 2001 Quarter [Claim 5] 85 Actual Acquisition Costs for the September 2001 Quarter 87 Vodafone's case 88 December 2001 Quarter [Claim 6] 90 Vodafone's approach to the Quarters for March, June, September and December 2002 91 Retention Funding Dispute [Claim 8] 92 Direct Marketing (X4) dispute [Claim 9] 96 Repudiation [Claim 10] 98 Interest 101 The evidence 102 General test of objectivity 102 Approach to the evidence adduced 106 Pre- contractual communications 107 Exhibit xx 110 Post-contractual communications 113 Matrix of facts objectively known to both parties against which the ASP was executed 118 Dramatis personae 119 Mobile Innovations witnesses: 120 Mr Bramwell 120 Mr Marchbank 121 Mr Shaw 122 Mr Ralph Stonell 123 Mr Steven Ikeda 125 Ms Claire Statham 127 Mr Ilkka Tales 128 Vodafone witnesses: 129 Mr Julian Ogrin 129 Mr Christopher Wisbey 130 Mr Todd Buckley 131 Ms Jayne Blake 132 Ms Cindy Moussa 133 Mr Paul Stormon 135 Mr Grahame Maher 137 Mann Made Marketing Pty Ltd 138 Affidavits or Statements read but not examined on 139 Mark Nicholas Jones 139 Cindy Moussa 142 Expert evidence on damages 145 The Evidence 147 Targets set and plans sold 147 The sundry business plans which were sold 149 Statistics 151 Confusion factor 152 Theme of the cross-examination of Mobile witnesses 153 Profitability of Mobile up to 1999 156 Reliability 158 Evidence given by Mr Marchbank 162 Fixing and reduction of targets 165 Evidence given by Mr Shaw 166 Targets set from October 1998 up to March 2000 quarter 168 Late 1997 169 January 1998 - October 1998 170 Proposal to float 172 Modelling 174 Security factor 175 Value of future contract to make up perceived value 177 Guarantee of connection discussions 180 October 1998 and following 181 October 1998 - December 1999 181 December Marketing Plan 182 Vodafone objectives 183 3 February 1999 – Overhead costs higher than expected 186 March 1999 – Marketing of plans other $10.00 plan 187 15 March 1999 – Float concerns 189 17 March 1999 190 18 March 1999 191 26 March 1999 193 29 and 31 March 1999 196 1 April 1999 198 2 April 1999 199 Early April 1999 200 7 April 1999 201 Prospectus issued 204 25 May 1999 – Agreement to vary the ASP Agreement 209 24 June 1999 - Ms Blake email [3/ 457P] 211 25 June 1999 212 1 July 1999 213 30 July 1999 – Incentive withdrawn 214 4 August 1999 – Deteriorating relationship 215 13 December 1999 – Connection Performance Complaints 218 Mobile's Marketing Plan for January – December 2000 220 December 21 1999 [3/ 466] 220 January 2000 - June 2000 227 First Quarter of 2000 231 January 2000 – V Mobile Plan 233 12 January 2000 - meetings 235 Power point presentation [3/ 471] 235 Web site Proposal 238 17 January 2000 - Letter 3/ 498 Mobile to Vodafone 239 19 January 2000 3/ 506 240 February 2000 241 8 February 2000 – end of year financial freeze complaint 242 Misfit in Vodafone's distribution strategy 243 Channel Conflict 245 8 February 2000 3/ 517 246 10 February 2000 3/ 519 248 15 February 2000 3/ 524 249 24 February 2000 – 5/ 528 250 6 March 2000 251 8 March 2000 - Website Agreement 252 Early March 2000-Discussions concerning migration of 30,000 additional customers 253 Evidence of Mr Bramwell 254 9 March 2000 - Draft Letter of Intent [3/ 551] 255 Approximately 10 March 2000 - Draft Announcement to Market 256 13 March 2000 258 16/20 March 2000 – Additional Customer Management Agreement 258 3 April 2000 3/ 563 262 4 April 2000 264 The Strategy Document 563E 271 7 April 2000 E-mail Marchbank to Ogrin 3/ 564 272 11 April 2000 3/ 564A 273 12 April 2000 3/ 564B 275 18 April 2000 276 Early May 2000 278 The timeline which then unfolds on the migration issue 280 2 May 2000 – Repudiation of Migration Agreement 282 5 May 2000 3/ 572 283 8 May 2000 3/ 573 285 9 May 2000 3/ 576 286 10 May 2000 289 15/16 May 2000 290 19 May 2000 293 21 May 2000 295 25 May 2000-Channel strategy presentation 3/ 598A [see q] 300 25 May 2000 305 Letter Mobile to Vodafone [3/ 596] 305 27 May 2000 306 2 June 2000 308 7 June 2000 309 8 June 2000 – Notification to the marketplace 311 26 June 2000 3/606A 314 Early July 2000 315 July 2000 - MC 9 Plan 318 10 July 2000 4/607 319 11 July 2000 320 19 July meeting Ex xx page 53 321 July 2000 - December 2000 325 Late July – Proceedings commence 325 20 July 2000 3/ 608 326 21 July 2000 327 21 July 2000 3/609O 328 27 July 2000 328 Email 3/ 611 330 27 July 2000 MC9 Plan 334 28 July 2000 335 8 August 2000 341 15 August 2000 – ASP Amending Agreement [PX 8/ 1330AB] 350 28 August 2000 351 Quarter ending December 2000 – CTA Worksheet with target of 27,900 352 4 October 2000 353 5 October 2000 355 17 October 2000 358 1 November 2000 359 3 November 2000 360 6 November 2000 361 November 2000 365 15 November 2000 368 27 November 2000 369 30 November 2000 – BAM/CTA review 372 Mobile's summary of the ASP and of Vodafone position 374 Management Fee – reduced to nil for some subscribers 376 1 December 2000 377 7 December 2000 ASP Meeting - (minutes of the meeting are at 4/ 669) 379 12 December 2000 4/ 679 381 14 December 2000 4/ 679 382 After 17 December 2000 383 20 - 22 December 2000 [5/ 697 - 5/ 698] 384 22 December 2001 385 January 2001 - June 2001 386 11 January 2001 388 12 January 2001 - Target for June quarter of 23,000 mentioned 390 15 January 2001 392 19 January 2001 393 24 January 2001 395 25 January 2001 – ASP meeting took place. 396 31 January 2001-24,000 connections for June quarter 400 31 January 2001 6/ 726A-726B 401 1 February 2001 403 1 February 2001 6/729 406 1 February 2001 - Numbers massaging email 407 8 February 2001 412 15 February 2001 413 16 February 2001 415 19 February 2001 416 20 February 2001 420 21 February 2001 6/753 421 23 February 2001 421 27 February 2001 Draft CTA business plan for June quarter 422 28 February 2001 423 7 March 2001 – target of 12000 subscribers for 12 month period 430 Chief Executive Officer's Report February/March 2001 written by Mr Marchbank soon after 7 March 2001 [6/ 921D] 439 9 March 2001 6/ 790 442 9 March 2001 MC9 dispute 445 12 March 2001 6/ 776 448 13 March 2001 450 15 March 2001-Mobile Revised Budget Impact document - exhibit P5 452 15 March 2001 6/ 831 455 16 March 2001 Henry Davis York response 6/ 833 456 20 March 2001 459 20 March 2001 6/ 844 Draft CTA for June quarter appears at 6/ 764 466 21 March 2001 Amended CTA 466 CTA for the June 2001 quarter was based on 19,000 new subscribers 6/ 851 466 22 March 2001 467 Finding as to contextual background 470 29 March 2001 472 30 March 2001 6/907-913 473 3 April 2001 476 3 April 2001 480 5/6 April 2001 – June 2001 business plan 6/ 939; 6/ 946 481 9 April 2001 482 11 April 2001 483 17 April 2001 492 27 – 30 April 2001 493 1 May 2001 494 2 May 2001 495 2 May 2001 Beginning of negotiations for the September quarter 496 4 May 2001 497 11 May 2001 Retention Meeting 500 14 May 2001 501 15 May 2001 502 18 May 2001 503 23 - 25 May 2001 504 28 May 2001 505 29 May 2001 506 31 May 2001 507 6 June 2001 508 8 June 2001 [7/ 1116] 509 13 June 2001 510 14 June 2001 511 15 - 18 June 2001 512 19 June 2001 516 20 June 2001 517 22/23 June 2001 521 25 June 2001 524 26 June 2001 525 Early July 2001 527 4 July 2001 528 5 July 2001 529 7 July 2001 533 17 July 2001 534 July 2001 - December 2001 537 July 2001 on 537 Pre 13 July 2001 538 13 July 2001 - Mr Marchbank invokes the dispute resolution procedure in relation to the September CTA [7/1222-1224] 539 17 July 2001 541 Discussion Document presented to Vodafone – Suggested strategies for going forward" [7/ 1211- 7/ 1221] 541 18 July 2001 7/1225-1227 543 19 July 2001 544 23 July 2001 – Nil target notification 7/1228 545 27 July 2001 and following – redundancies 546 2 August 2001 Meeting between the parties – Nil target's hereafter: 547 22 August 2001 561 23 August 2001 563 Mobile comes to the position that it would not need to prepare business plans for the acquisitions of nil customers 564 30 August 2001 565 18 September 2001 566 28 September 2001 568 5 October 2001 572 24 October 2001 573 14 November 2001 575 16 November 2001 576 20 November 2001 577 6 December 2001 582 1 April 2002 587 CTA Worksheets for the June 2002 quarter and the September 2002 quarter 589 Vodafone's refusal to pay CTA 599 Marketing Agreement 600 The Question 602 The duty to cooperate, good faith and reasonableness causes of action 604 The principles governing implication of terms 604 The implied duty to cooperate in the performance of contractual obligations 606 Good Faith 613 The scheme of the ASP 618 Benchmark provisions 622 Best endeavours 634 Business plans 636 Nil target and nil business plan 639 Estimated and Actual Acquisition Costs 646 Resolving these disparate internal conflicts 650 Objectivity 651 Matrix of circumstances 654 Commercial contract 655 Implied terms 657 Holding in respect of the nil target issue 669 Proper Construction 669 Obligation to co-operate 673 Obligation of good faith and reasonableness 680 Implication of term in Connection with the Maintenance of a Business 695 Case law with respect to the implication of a term in connection with the maintenance of a business 695 Principles to be derived from the case law 712 Exclusion of implied terms 717 Returning to the Mobile case 730 The Way Forward 735 Causation and Damages/Loss 738 Onus 738 Difficulty of assessment 740 Hypotheticals 743 Loss or benefit or detriment dependent upon the making or exercise of discretionary decisions 747 Doctrine of efficient breach 751 Vicissitudes 754 Dealing with the matter 757 Applying these principles 759 Claims 6 and 7 777 Damages – December 2001 Quarter 777 Unpaid CTA 781 Damages - Subsequent quarters - March, June, September, December 2002; March 2003 793 Dealing with the disparate cases otherwise than the nil target issue 797 Additional Customer Management Agreement [Claim 1] 798 The nature of the obligations in the agreement 800 The repudiation of the agreement 801 Damages 808 The plaintiff's written submissions 809 Vodafone's submissions 810 Holding as to damages 811 V Mobile Plan [Claim 2] 815 MC 9 dispute [Claim 3] 816 Leave to address further submissions 832 June 2001 [Claim 4] 833 Damages 843 Claim 5 - September 2001 Quarter dispute 845 No agreed CTA 846 Redundancies - the construction issue 851 Retention Funding - Claim 8 854 Web site Agreement - Claim 11 858 Staff Salaries 859 Security Costs 860 Direct marketing (X4 and HIA) Dispute - Claim 9 862 The relevant clauses in the ASP 863 The nature of Mobile's exclusivity rights 864 Use of the word "solely" in the definition of "Mobile Direct Marketing Operation" 864 X4 and the Housing Commission 868 Direct Marketing by Vodafone 869 Dealing with the matter 870 Relief 880 Repudiation [Claim 10] 881 Short Minutes of Order and further address 884 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST EINSTEIN J Thursday 27 March 2003 50123/01 MOBILE INNOVATIONS LIMITED v VODAFONE PACIFIC LIMITED & ORS JUDGMENT The Proceedings 1 These proceedings concern disputes arising from the contractual and other arrangements of parties carrying on the business of providing mobile telecommunications services. 2 The principal issues concern the proper construction of a long-term commercial agreement of some complexity. As often occurs in relation to such agreements the parties who have contracted into the future using a variety of concepts, formulae and detail, later come to heated disputation about what was agreed. The construction and other issues treated with in the judgment were hotly contested, no doubt by reason of the significance which findings one way or the other would have to the parties disparate commercial interests. The parties 3 The Vodafone group is an international network of companies. The first defendant, Vodafone Pacific Ltd [formerly Vodafone Network Pty Ltd] ["Vodafone Pacific"], the second defendant Vodafone Network Pty Ltd ["Vodafone Network"] and the third defendant Vodafone Pty Ltd ["Vodafone Pty Ltd"] comprise three particular Australian companies forming part of this group. Vodafone Network and Vodafone Pty Ltd were at material times wholly owned subsidiaries of Vodafone Pacific. Vodafone Pacific is a wholly owned subsidiary of Vodafone Plc, which is listed on the London Stock Exchange. 4 Vodafone Pacific was at all material times a carrier licensed under the Telecommunications Act 1997 (Cth) in respect of activities including provision of mobile telecommunications services to subscribers. Ownership and transfer of the Network 5 Prior to April 2000 Vodafone Pacific owned and operated a public mobile telecommunications network in Australia. 6 In April 2000 Vodafone Pacific transferred its network to Vodafone Network which has since operated the network. 7 A convenient schedule identifying the relevant events with respect to transfer of the network and changes of name and novations was prepared by the plaintiff [MFI 5] and is conveniently appended as appendix "A". 8 The plaintiff Mobile Innovations Ltd ["Mobile" or "MI"] is a company listed on the Australian Stock Exchange. It conducted a business of obtaining and managing customers for Vodafone. In particular, Mobile specialised in obtaining customers using "direct marketing" (also known as "remote selling"). It was sometimes referred to as Vodafone's direct channel. Direct marketing involves placing advertisements in press, magazines and direct mail and receiving the resulting orders centrally by telephone, fax, email or the Internet and then processing those orders. Advertising in mass circulation media (press and magazines) is also called "off the page" marketing. 9 Mobile entered into a series of agreements with either or both of Vodafone Pacific and Vodafone Network. One issue which was raised on the pleadings but ultimately not litigated concerned which of the Vodafone companies had entered into the relevant contracts. Save where it is necessary for obvious reasons to differentiate between Vodafone Pacific and Vodafone Network, the convenient course is to follow the approach taken in the Further Amended Summons by describing Vodafone Pacific and Vodafone Network jointly and severally as "Vodafone". The Agreements GSM Service Provider Agreements - 13 May 1994; 7 November 1996 10 On 13 May 1994 and on 7 November 1996 Mobile entered into GSM Service Provider Agreements with Vodafone Pacific (then called Vodafone Pty Limited) under which Mobile agreed to purchase mobile telecommunications services from Vodafone in order to resell those services to subscribers who became its customers [known as Mobile's "subscriber base"]. Customers acquired by Mobile under that agreement were connected to the Vodafone network but remained Mobile's customers. 11 The terms of these agreements are not in issue, the agreements providing no more than the backdrop for later agreements which are in issue on a number of parameters. Structural changes to the relationship 12 Commencing in late 1997 and continuing until August 1998 Vodafone and Mobile engaged in negotiations to change the structure of their relationship so that: (a) Mobile sold its subscriber base to Vodafone; (b) Mobile acquired and managed customers as an agent for Vodafone. Heads of Agreement 13 On 27 August 1998 Heads of Agreement were signed. ASP Agreement - October 1998 14 On 2 October 1998 Mobile and Vodafone Pacific (then called Vodafone Network) entered into: · an Offer For Sale and a New Agreement which terminated the GSM Service Provider Agreement and transferred to Vodafone, Mobile Innovations' Subscriber Assets[ or Base]; and · an Agent Service Provider Agreement ["the ASP Agreement" or the "ASP"]. 15 A substantial consideration of approximately $20 million ($260 per subscriber) was paid upon the transfer of the subscriber base to Vodafone. 16 Mobile asserts that by the ASP Agreement, Vodafone Pacific engaged it as its agent to: · acquire and connect New Subscribers to mobile telecommunications services made available to Subscribers by Vodafone on a post-paid basis ["the Acquisition Services"]; · provide Management Services including "retention activities and handset upgrades" to new and existing subscribers ["the Management Services"]. 17 Vodafone asserts that under the ASP Agreement, Mobile was appointed as agent for Vodafone Billing Services Pty Ltd ["Vodafone Billing Services"] to provide Acquisition Services and Management Services. Vodafone further asserts, as seems, patently to have been the case, that the words "retention activities and handset upgrades" were subsequently inserted into the ASP Agreement pursuant to the terms of the May 1999 Amendment Agreement referred to below. First Amendment Agreement - May 1999 18 In or about May 1999 a written Amendment Agreement was entered into pursuant to which amendments were made to the ASP Agreement. This agreement records the parties to it as Mobile and Vodafone Network and commences with recital A asserting that Vodafone Network and Mobile "are parties to an Agent Service Provider Agreement dated 2 October 1998 under which [Mobile] performs certain customer acquisition and Management Services on behalf of [Vodafone Billing Services] (the ASP Agreement)". 19 This Amendment Agreement made some alterations and additions in relation to the provisions of the ASP Agreement concerning Acquisition Costs and Management Costs. [cl.2.2(f), (g)]. In particular, the Amendment Agreement introduced a differential management fee, with a lower fee being payable for "low tariff plans", namely plans with monthly access fees of $20 or less. [cl.2.2(g)] Novation/Parties to the ASP Agreement as at the date of the May 1999 Amendment Agreement 20 In its pleading concerning the suggested identification of the parties to the ASP Agreement, Mobile put the matter as follows: "In that the parties to the ASP Agreement were Mobile and Vodafone Pacific and that the parties to the Amendment Agreement were Mobile and Vodafone Network then the parties to the ASP Agreement as amended by the Amendment Agreement… were Mobile and Vodafone Pacific or Mobile and Vodafone Network or Mobile and both Vodafone Pacific and Vodafone Network, Vodafone Pacific and Vodafone Network are hereinafter referred to jointly and severally as "Vodafone". 21 Vodafone pleads that · the ASP Agreement was novated from Vodafone Pacific to Vodafone Network on or about 31 March 1999; and · in the alternative that Mobile is estopped from denying such novation as having occurred in or about May 1999. 22 Ultimately the issue was not litigated. Second Amendment Agreement - August 2000 23 The August 2000 Agreement ["second Amendment Agreement" or "Look Mobile Amendment"] gave Mobile another means of acquiring customers for Vodafone through a "dealer" called 'Look Mobile', in which Mobile hold a 50% interest. 24 The convenient course is to append the ASP Agreement and part of the "Operations Manual" [see definition of "Business Plan"] as appendix "B", the first Amendment Agreement as appendix "C", and the second Amendment Agreement as appendix "D" to this judgment. Glossary 25 A useful glossary prepared by Mobile is appended as appendix "E" to this judgment. General nature of issues for determination 26 On 23 July 2001, Vodafone notified Mobile that the target level for the December quarter was nil. These proceedings were commenced on 27 August 2001 in response to that decision. 27 In due course Mobile ceased their acquisition activities although they continue to incur particular fixed costs which could not be avoided. Mobile's general claim in this regard includes a claim in respect of lost base acquisition margins and lost Costs to Manage [" CTM"]. 28 Whilst the pleaded issues extend to a general claim that Vodafone over the relevant period of time engaged in conduct constituting a repudiation of the ASP it is convenient to note even at this early stage the evidence given by Mobile's expert, Mr Gower, as to Mobile's audited/reviewed operating profit before tax for the years ended 30 June 1999, 2000, 2001 and the half-year ended 31 December 2001. The following Schedule speaks for itself in terms of emphasising the radical problems presented by the period in issue now litigated: Year ended Year ended Year ended Half yr end 30-Jun-99 ($) 30-Jun-00($) 30-Jun-01($) 30-Jun-01($) Audited/reviewed operating profit before tax and abnormals 4,028,505 4,693,920 5,234,328 13,845 Source: Mobile Innovations audited/reviewed financial statements 29 It is inappropriate to endeavour to repeat the pleadings particularly where, in addition to the nil determination question, there were so many disparate issues which, although recurring and requiring for determination a proper understanding of the whole of the contractual relationship between the parties, were in substance discrete sub-contract matters. 30 A number of the issues for determination concern alleged breaches of express and implied terms of the ASP Agreement. Without any intention to be exhaustive, I set out below a general overview of much of the matters which were litigated. In due course the judgment, of course, deals with all of the matters which were litigated. Implied Terms 31 Important questions were litigated concerning the alleged implied terms that Vodafone would: · do whatever was necessary to be done on its part to enable Mobile to have the benefit of the ASP Agreement; · refrain from doing anything which would or which was calculated to deprive Mobile of the benefit of the ASP Agreement; [Each of these implied term allegations were described in the pleading as "the co-operation term"] · act in good faith and reasonably in exercising its powers under the ASP Agreement ["the good faith term"]. 32 The proceedings then include a number of disparate contractual questions often simply arising as effectively contracts within the ASP Agreement and sometimes suggested as arising by arrangements, either oral or in writing or both, said to have been entered into as part of the regime imposed by the ongoing umbrella ASP Agreement. Certain estoppel questions are raised by the defendants pleading that the plaintiff is estopped from taking a particular stance in relation to a suggested matter of agreement or similar. 33 One matter which should be noted as essentially grounding the commercial reasons for aspects of the subject dispute concerns the commercial realities/dynamics in terms of the different positions of the parties. In that sense the only customers worth having for Vodafone appear to have been those who would be profitable on a net basis. In short that would require Vodafone to derive revenue which exceeded the costs of acquiring and maintaining such customers. Whilst for a limited period corporations may and usually will seek to build up their businesses by building up turnover, but not profit, that approach long-term would obviously be, as senior counsel for the plaintiff put it, a recipe for disaster. And as the evidence clearly established, for each new subscriber which Mobile was able to sign up for Vodafone, there were a number of immediate costs to Vodafone not covered by revenue immediately derived. Hence Vodafone was sensitive to the number of new subscribers, requiring to pay very careful attention to the periods of time in which they were signed up. 34 On the other hand Mobile was paid by reference to an acquisition [cost plus margin] fee as well as a management fee. Neither of those fees were based on revenue so that the higher Mobile's costs were, the higher the fee would be, by reason of the fact that the margin was based on a percentage of costs. In the result Mobile had a high incentive to bring in new subscribers. Overview of the ASP Agreement 35 Broadly the ASP Agreement includes a series of provisions to regulate the appointment of Mobile as a non-exclusive agent service provider during the term as defined. The term was to commence on 30 September 1998 (or such other date as may be agreed) and was to terminate upon the earlier occurrence either of the termination of the Agreement under clause 27 or otherwise on the 10th anniversary of the Effective Date. 36 The issues for determination extend to cover the express provisions concerning how the parties would prior to each quarter, approach a number of matters which apparently required agreement relating to their respective obligations for the approaching quarter. The provisions included for example: · Clause 1.1 which includes: - a detailed definition of "Estimated Acquisition Fee" in respect of each month during any calendar quarter where the application of the formula required the input as integers: - of a figure representing "the number of new subscribers estimated to be connected to use the System in that month…"; - of a figure representing "the number of new subscribers estimated to be connected to use the System in that month…". - a definition of "dispute" as meaning: - "subject to clause 32.6, any failure by the parties acting in good faith to agree on any matter arising from or in relation to any aspect of this Agreement." [emphasis added]; · Clause 17.2 providing that not later than 5 business days after the commencement of each quarter, the parties would agree the Estimated Acquisition Cost…; · Clauses 18.4 and 21.1 providing that not later than the commencement of the month prior to the commencement of each quarter, Vodafone would: - agree with Mobile the number of new subscribers expected to be connected in the next quarter; or - alternatively, determine the number of new subscribers expected to be connected in the next quarter; [The terms of the all critical Clause 18.4 were; " Connection levels Vodafone will have the sole discretion to determine, from time to time, the target level in respect of the number of connections of new subscribers. The target level will be determined by Vodafone in conjunction with the determination of the Business Plan referred to in clause 21."] · Clause 21.1 providing that not later than the commencement of the month prior to the commencement of each quarter Mobile and Vodafone must use their best endeavours to agree a Business Plan for that quarter; · Clause 43 entitled "Further Assurances" and providing that each party was to take all steps, to execute all documents and to do everything reasonably required by any other party to give effect to any of the transactions contemplated by the Agreement. 37 Mobile in its initial overview submissions conveniently set out certain detail of the ASP Agreement and it seems convenient, if only to enable one to follow Mobile's suggested construction of the Agreement and the suggested logic underpinning this construction, to simply repeat these submissions making plain that where the summary proves contentious, or was supplemented in final address, the judgment below exposes and determines the relevant issue. These submissions included the following: · "There were several key aspects to the ASP Agreement. (a) MI was to perform two main functions (cl 2.1): (i) acquire new subscribers for Vodafone using direct marketing (ii) manage (billing, customer care, disconnections) both existing and new subscribers. (b) MI was to devote its direct marketing operations exclusively to Vodafone and not deal with competing carriers (cl 2.2). (c) MI was exclusively entitled to acquire customers for Vodafone using direct marketing (cl 2.7). (d) The agreement was for 10 years (cl 3), namely until 30 September 2008. (e) MI was to be remunerated for acquiring customers by: (i) recovering its actual costs of acquisition each quarter – the procedure was to calculate its estimated costs of acquisition prior to the commencement of the quarter, which were then paid during the quarter with an adjustment at the end of the quarter to reflect actual costs (cl 17) [ the estimated acquisition fee was calculated on a quarterly basis in advance, payable on a monthly basis in arrears as explained at transcript 30.15 ] (ii) receiving a (profit) fee, known as Base Acquisition Margin ( BAM ), calculated upon the number of connections each quarter – the initial BAM was $40 per connection up to 8,000 connections and $20 per connection thereafter (cl 18). (f) MI was to be remunerated for managing customers by being paid a management fee, calculated upon the number of customers each month – the initial fee was $7 per customer per month (cl 20) (the management fee was often referred to by the parties as " CTM ", standing for "Cost to Manage"). (g) The BAM and management fee were to be reviewed after 2 years and annually thereafter, with adjustments dependent upon changes in CPI and MI's management costs respectively (cl 18.1, 33 and 20). (h) MI and Vodafone were to agree a quarterly business plan, based upon a "target level" determined by Vodafone, for acquisitions for the upcoming quarter (cl 21). The business plan and target were the basis for calculating the estimated costs of acquisition. · The [first] Amendment Agreement, amongst other things, altered clause 20.1 to provide varied CTM rates, rather than the fixed CTM rate of $7, as follows: (a) $7 for monthly billed customers (b) $6.00, reducing to $5.50 (1/7/99) and $5 (1/7/00) for monthly billed customers on low access (less than $20) plans (c) $5.50, reducing to $5 (1/7/00) for quarterly billed customers on low access plans (d) other quarterly billed customers to be separately negotiated. · MI (as did Vodafone) promoted a number of different "plans" to which potential customers could connect – the plans varied by matters such as minimum monthly charges, call rates charged, free services provided etc. · The procedure for agreeing quarterly business plans generally, or at least ideally operated as follows. At some time prior to the commencement of the quarter Vodafone informed MI of the target level for the upcoming quarter. MI then formulated a business plan, known as a "Cost to Acquire (CTA) Worksheet", incorporating: (a) the plans or brands proposed to be promoted (b) the allocation of the target amongst the plans (c) the allocation of revenue (eg payments by the customer for handsets or connection fees) and costs (eg handset costs, advertising costs, sales commissions) to the plans (d) the allocation of MI's overheads attributable to carrying out acquisition activities (e) the BAM payment based on the targeted level of connections (f) to derive an average "CTA" per customer. · The proposed CTA Worksheet was then negotiated until an agreed position was reached. The average CTA per customer was used as the basis for paying the estimated acquisition cost required under the ASP Agreement. The parties referred to each quarter by the last month in the quarter. For example, the quarter of April – June 2001 was referred to as the June 2001 quarter." [The CTA worksheet for June 2001 quarter, showing a target of 14,150 and a CTA per customer of $497.82 is at TB941.] 38 It is common ground that both parties treated the CTA worksheets which were generated as synonymous with and as a substitute for the business plans provided for in the ASP. [Evidence of Mr Stonell at transcript 705 - 706: describing the CTA worksheets as a "surrogate" for the business plan, and accepting that negotiations about these worksheets were in effect negotiations about what might be called business plans]. No point was taken by either party suggesting that this approach was inappropriate, presumably for the reason that the CTA worksheets contained sufficient information to permit them to be utilised effectively as business plans. As Mr Stonell put it, the major part of the CTA process involved getting the allocation of the budget for marketing for the reason that a lot of the advertisements had to be placed a month before they would appear in the press. [Transcript 705] 39 Mr Stonell gave the following evidence: "Q. Mr Stonell, is it the case that without a target being given by Vodafone there is no way one can produce a CTA, because it all works the engine for the CTA starting point. That is a target, is that right? A. I suppose if you have a target of say 1,000 customers for a month, just to pick a number, you have to determine how you are going to get those 1,000 customers, or acquire those customers. There are so many different offers, a high end offer, a low end offer, different types of phones. Once a target is set we have to work out how to achieve that target. Q. Does that mean the answer to my question is yes? A. Yes." [Transcript 707] 40 For those reasons the references made in this judgment to "business plans" may be regarded as interchangeable with the CTA worksheet regime. 41 Vodafone pleaded that the following terms were part of the ASP Agreement namely that: · Mobile acknowledged that any group member may at any time: - suspend or discontinue any or all of the Mobile Services; - amend or replace the Standard Terms and Conditions; - subject to clause 8.1, change the tariff at which the Mobile Services are supplied to subscribers. · Vodafone would use its best endeavours to give Mobile reasonable notice in advance of any replacement of or amendment to the Standard Terms and Conditions or any change to the tariff at which the Mobile Services were supplied where that replacement or amendment or that change would cause detriment to subscribers. [Clause 7.4 of the ASP Agreement] The nil determination issue 42 As already mentioned, a matter of special significance concerns: · certain written notices given by Vodafone which purported to determine that the target level for particular quarters was nil; · an alleged failure to determine target levels for particular quarters; · 2 August 2001 when Vodafone was said to have advised Mobile that it intended from thereon to purport to determine a nil target level for new subscribers. 43 Mobile's submission is that nil is not "a number of new subscribers expected to be connected in the next quarter" within the meaning of clause 1.1; nor is it a "target level in respect of the number of connections of new subscribers" within the meaning of clause 18.4. 44 The quarters in question are those ending: Written Notices · 31 December 2001 [written notice dated 23 July 2001; "Determination"] · 31 March 2002 [written notice dated 12 March 2002; "Second Determination"] · 30 June 2002 [written notice dated 12 March 2002; "Second Determination"] Failures to determine · 30 September 2002 [failure to determine target level] · 31 December 2002 [failure to determine target level] · 31 March 2003 [failure to determine target level] 45 The approach taken by Mobile is to assert that the nil determinations were: · in breach of clause 1.1 ["Estimated Acquisition Cost"]; · in breach of clause 18.4; · in breach of clause 43; · in breach of the alleged co-operation term; · in breach of the alleged good faith term. 46 Mobile asserts that as a result of the 23 July 2001 Nil Determination, it made several of its employees redundant between 27 July 2001 and 31 January 2002. 47 Mobile asserts that the consequence of both the nil Determinations as well as the failure to determine target levels for other quarters, involve Vodafone: · refusing to attempt to agree Estimated Acquisition Costs for the relevant quarters under clause 17; · refusing to attempt to agree business plans for the relevant quarters under clause 21.1; · representing that it would not pay and in fact not paying, either the Estimated Acquisition Cost or the Actual Acquisition Costs for the relevant quarters. 48 Vodafone's submission is that the ASP Agreement as amended entitles it to set target connection levels for a quarter at zero. Statistics 49 Exhibit D6 provides a convenient table: Date Target CTA budget TB Ref Actual CTA Actual TB Ref Cnnxn variance CTA variance Dec-98 15,000 $ 434.45 316E 14,611 $470.84 323J 389 -$ 36.39 Mar-99 16,000 $ 398.24 323L 16,692 $406.23 1713 -692 -$ 7.99 Jun-99 18,000 $ 426.19 1346 15,171 $416.44 1737 2,829 $ 9.75 Sep-99 24,000 $ 410.55 1351 18,397 $446.36 1765 5,603 -$ 35.81 Dec-99 18,000 $ 409.69 1356 15,182 $439.19 1790 2,818 -$ 29.50 Mar-00 20,000 $ 453.13 1361 7,979 $748.67 1820 12,021 -$ 295.54 Jun-00 19,000 $ 531.30 1368 13,782 $650.28 1848 5,218 -$ 118.98 Sep-00 26,500 $ 472.30 1373 23,017 $509.71 1878 3,483 -$ 37.41 Dec-00 27,900 $ 455.11 1375 29,582 $454.62 1911 -1,682 $ 0.49 Mar-01 19,105 $ 471.50 1380 20,489 $434.26 1938 -1,384 $ 37.24 Jun-01 14,150 $ 497.82 941 10,475 $545.46 1970 3,675 -$ 47.64 Sep-01 9,000 $ 616.39 1158 3,861 $970.31 1995 5,139 -$ 353.92 Identification of the eleven disparate cases 50 The convenient course is to simply identify each of the disparate cases. 51 One approach is simply to travel through these cases generally as they arose by reference to the timeline. Here again Mobile in its overview submissions [which were ultimately adapted to take into account updated experts agreed calculations as well as some finessing by Mobile with both how it puts its case as well as with its ultimate damages claims] sketched out how the 11 disparate cases arose as follows: · "On 30 November 2000 Vodafone, having completed its first review of BAM and CTA, notified MI that the new rates were as follows: (a) BAM: (i) $43.17 per connection up to 8,000 connections (ii) $21.58 per connection thereafter (b) CTA (i) $7.67 for monthly billed customers (ii) $5.67 for monthly billed customers on low access plans (iii) $5.00 for quarterly billed customers (iv) $nil for non-tolling V Mobile customers. · MI disputes that Vodafone was permitted to set a $nil CTM for non-tolling V Mobile customers · For each quarter from the commencement of the ASP Agreement until the June 2001 quarter the parties agreed a CTA and business plan, although occasionally only after significant disputes and often not within the timeframes dictated by the ASP Agreement. The quarterly targets varied from time to time, but were generally around 20,000 and peaking at 27,900 for December 2000 quarter. · In early 2001 Vodafone determined radically to change the way business had been done since the inception of the ASP agreement. This process was first put into effect when on 28 February 2001 MI was informed by Mr Brown and Mr Stormon of Vodafone that, far from a target of 23,000 for the June 2001 quarter, which had been agreed with Mr Webb (Vodafone's Finance Director) at the end of January, there was now a target of 12,000 for the 2001/2002 year (April 2001 to March 2002). Vodafone followed up with a letter dated 7 March 2001 to the same effect (TB775). Claims 1 - 3 · However during that period several subsidiary disputes arose between the parties. They are described as Claims 1 – 3 below. [Claim 1 – ACM Agreement dispute; Claim 2 – V Mobile dispute; Claim 3 – MC 9 dispute] Claim 8 · In early 2001 Vodafone decided to change its business approach to reduce the emphasis on customer acquisition and concentrate on high value customers. For the June and September 2001 quarters it drastically reduced the targets and changed the plans available to be used. Further, in March 2001 it changed the amount of, and criteria for, retention funding provided to MI. As a consequence MI suffered a significantly increased loss of customers through "churn". That is Claim 8. Claims 4 and 5 · Although a business plan was agreed for the June 2001 quarter, MI did not achieve the target, because, MI alleges, Vodafone did not provide the plans to enable MI to do so. That is Claim 4 below. As for the September 2001 quarter MI alleges, and Vodafone disputes, that no business plan was agreed. That is Claim 5. Claims 6 and 7 · For each of the succeeding quarters (December 2001 – March 2003) Vodafone has either set a nil target or failed to set any target. That is Claims 6 and 7. They include claims for CTA (including redundancies) which Vodafone has refused to pay. Claim 9 · At various times since July 2001 Vodafone has dealt with MI's direct marketing competitors in contravention of its exclusive arrangement with MI. That is Claim 9. Claim 10 · Claim 10 is an allegation that Vodafone, through one or more of setting nil targets, failing to set targets, dealing with MI's competitors and withdrawing retention funding, has repudiated the ASP Agreement. Declaratory relief only is pursued. Claim 11 · Finally, there is a discrete claim for MI's costs of running a direct marketing e commerce website for Vodafone under an agreement in which Vodafone undertook to pay for all hosting and communication with the portal. That is Claim 11". V Mobile Plan – Claim 2 52 On the final day of the four week hearing Vodafone withdrew its defences to this claim and consented to judgment. The original issues will however be described as a deal of the oral evidence often intermingled this and other claims which remain in issue. 53 The separate issue concerned Mobiles allegation of an oral agreement entered into in approximately January 2000 whereunder the parties agreed that: · Mobile would launch a mobile call plan under what was referred to as the "V Mobile Plan" brand; · Vodafone would pay Mobile a Management Fee for subscribers connected by Mobile on this Plan as described in clause 20.1 (a) and (c). 54 Mobile asserted and Vodafone accepted that on 20 April 2000 Mobile launched the subject plan. 55 Mobile asserted that on 30 November 2000 Vodafone, purporting to rely on clause 20.3, notified Mobile that the Management Fee payable to Mobile would be reduced to $0 for subscribers on the subject Plan who were not making any telephone calls. 56 Mobile then asserted that the change in Management Fee constituted a breach of clause 20.3 which it was said, did not permit Management Fees to be reduced to nil. This was denied by Vodafone. 57 Mobile alleged that in breach of clause 20.1,Vodafone had not since 1 November 2000, paid a Management Fee for those subscribers connected by Mobile on the subject V. Mobile Plan who have not been making any telephone calls. MC 9 Plan [Claim 3] 58 Mobile's case here concerns an allegation that in approximately July 2000 Vodafone requested it to devise marketing plans that would enable Vodafone to expand its customer base and become the second largest mobile phone provider in Australia. The allegation is that in response to that request Mobile devised a $9 call Plan ["MC9 Plan"]. 59 Mobile further alleges that on approximately 19 July 2000 it agreed with Vodafone that: · Mobile would offer the MC 9 Plan · Vodafone would pay Mobile a Management Fee of $7 per subscriber per month for subscribers connected by Mobile on this Plan. 60 The allegation is that in those circumstances Vodafone and Mobile agreed to vary the ASP Agreement so as to treat Subscribers to the Plan as "Subscribers" within the meaning of clause 20.1 (a) [to whom the $7 per Subscriber per month Management Fee applied]. 61 The subject Plan is said to have commenced operation in September 2000. 62 Mobile claims that on or about 30 November 2000 pursuant to clause 20.3, Vodafone notified it that the Management Fee payable to Mobile for Subscribers within the meaning of clause 20.1 (a) was to be increased to $7.67 per Subscriber per month. 63 Mobile alleges that since February 2001 Vodafone has refused to pay it a Management Fee of $7.67 per subscriber per month for subscribers connected by it on these plans and is only paid a Management fee for those subscribers of $5.67 per Subscriber per month. 64 The claim is that in those circumstances Vodafone has breached clause 20.1 of the ASP Agreement as varied. Mobile's Case 65 Mobile's case is put in overview submissions as follows: · In July 2000 Vodafone commenced a drive to acquire a significant number of customers. As part of that drive Vodafone formulated a new, competitive, $9 plan for MI to market, which became known as the MC9 plan. The MC9 plan involved a $9 monthly access fee, no connection fees, competitive call rates and a level of free minutes (Vodafone's "My Choice" program). · MI alleges that the basis upon which it agreed to sell the MC9 plan was that customers would be billed monthly and Vodafone would pay the higher CTM of $7 (that applicable to high tariff plans) notwithstanding the MC9 was a low access fee plan. Vodafone paid CTM on that basis until February 2001. · However, commencing in February 2001 Vodafone ceased paying the higher (then $7.67), and started paying the lower ($5.67), CTM for MC9 customers which it considered had an ARPU of less than $30. During the period February 2001 to March 2002 this was approximately 86% of the MC9 customer base. · MI alleges that Vodafone must continue to pay the higher CTM for all customers on the MC9 customer base. The issues · The principal issue is whether an oral agreement was entered into which is binding given the terms of the ASP Agreement and whether the conduct of Vodafone in refusing to pay the higher CTM is a breach. The damages claim · MI claims $3,497,865 [Gower 1 para 184], made up as a combination of [Gower 1 para 167 – 185]: (a) the lost CTM ($2 per customer, being the difference between the higher rate of $7.67 and the lower rate of $5.67) for low ARPU MC9 customers between February 2001 and March 2002 (b) the net present value, as at 1 April 2002, for the period from 1 April 2002 to 30 September 2008, of the lost CTM for low ARPU MC9 customers, assuming that continues to represent 86% of the customer base. Vodafone's case 66 Vodafone has a number of responses to this case including an assertion that by reason of clause 45 (a) of the ASP Agreement there could be no binding variation to that Agreement which was not in writing. 67 A further response asserts that subsequent to the Amendment Agreement by reason of certain conduct Vodafone and Mobile agreed to: · the high Management fee for managing low value customers if the average monthly spend of those customers had been greater than $30; · the low Management fee for managing low value customers if the average monthly spend of those customers had been less than $30. 68 Vodafone also relies upon an estoppel and arising to prevent Mobile from maintaining these allegations. 69 Vodafone in Overview submissions summarises this case as follows: · The MC9 Plan was a plan proposed by MI to Vodafone, which included a monthly access fee of $9. The plans were offered to subscribers from September 2000 onwards. Vodafone has at all times paid a Management Fee to MI in respect of the customers connected to the MC9 Plan. However, MI asserts that the amount of the fee paid to it by Vodafone was inadequate. · Under clause 2.2(g) of the Amendment Agreement, clause 20.1 was amended to include a two-tier approach to management fees with the full $7 per month Management Fee being payable by Vodafone to MI in respect of ordinary subscribers, with a lesser amount being paid to MI for subscribers on a "low tariff plan". Low tariff plans were not defined exhaustively but did include: "any other plan introduced with [monthly] access fees of less than $20.00 (whether or not free calls are included) who is connected after 1 April 1999." · Accordingly, MI has no entitlement to be paid a full Management Fee in respect of the subscribers to the MC9 Plan. Nevertheless, Vodafone has been prepared to pay MI the full Management Fee for those MC9 subscribers whose average monthly call charges (or "spend") has exceeded $30, but has paid the lower fee in respect of all other customers. The fact that Vodafone has been prepared to make such payments, rather than to insist upon its strict contractual rights, does not create any obligation to MI either to maintain this practice, nor does it create any right on the part of MI to claim the Full Management fee in respect of the low spend customers." Additional Customer Management Agreement [Claim 1] 70 Mobile's case is that on 20 March 2000, Vodafone Pty Ltd agreed to provide Mobile, on or before 30 June 2000, with 30,000 additional customers in respect of which Mobile would undertake Management Services ["Additional Customer Management Agreement"]. The case relies upon a letter Agreement. 71 The assertion is that Vodafone Pty Ltd failed and refused to transfer the 30,000 additional customers to Mobile and that in consequence Vodafone Pty Ltd has breached the Additional Customer Management Agreement. 72 Vodafone essentially asserts: · that a written agreement evidenced by a letter 16 March 2000 from Vodafone Pty Ltd to Mobile was entered into between it and Mobile; · that Vodafone did not transfer an additional 30,000 customers to Global in the manner contemplated by this letter; · that the Additional Customer Management Agreement was terminated by agreement between the parties in or about May or June 2000; · alternatively that Mobile agreed that Vodafone Pty Ltd was not obliged to transfer the additional 30,000 customers to Mobile in the manner contemplated by the 16 March 2000 letter; · alternatively that certain representational conduct was engaged in by Mobile to the effect that it would not require Vodafone Pty Ltd to transfer the additional customers to Mobile in the manner contemplated by the letter. The allegation is that it would be unconscionable for Mobile to maintain these allegations and/or that Mobile is estopped from maintaining these allegations. 73 Mobile in overview submissions asserts that: · The facts indicate that, far from being discharged by agreement, MI has uniformly [pressed] its existence and breach". · The estoppel pleaded fails to meet the threshold criteria and in particular relevant detriment. The damages claim · MI claims the lost future CTM, for the period from 1 July 2000 to 30 September 2008, on the customers who were to be transferred [Gower report of 13 June 2002 (Gower 1) para 186 –210]. · The net present value of the claim, as at 1 July 2000, is said by Mobile to be $2,634,621 [Gower report of 10 February 2003 (Gower 2) Annexure B-0 (updating Gower 1 para 209). For all disputes, other than Claim 8 – Retention funding dispute, these submissions use the post retention funding calculations of Mr Gower] 74 Vodafone in overview submissions asserted as follows: · The "agreement" on which MI relies is a letter from Vodafone to MI dated 16 March 2000. However, that agreement never had any contractual force, because no consideration was payable to Vodafone for the proposed transfer of subscribers. Despite Vodafone's willingness to accommodate MI's request for the subscriber transfer as evidence by the letter of 16 March 2000, when Vodafone looked into the matter, it realised that the transfer was not practical from a cost or operational point of view. Thereafter, Vodafone and MI agreed not to pursue this "agreement". [The lack of consideration issue was abandoned during the hearing] · Vodafone kept MI advised at all times of the problems which it foresaw in relation to the customer transfer. MI's complaint in relation to this matter is misconceived. 75 The issues on this claim are thus whether the agreement was discharged, the efficacy of the estoppel and quantum. Website Agreement [Claim 11] 76 Mobile's case is that on 8 March 2000, Vodafone Pty Ltd offered to enter into a contract with Mobile under which Mobile would, inter alia: · develop Vodafone Pty Ltd's E-Commerce platform; and · perform all back-office functions for the E-Commerce platform 77 Mobile asserts that: · the letter comprised an agreement to develop an e commerce portal for Vodafone; · after 8 March 2000 it carried out both of these obligations, the portal being launched in May 2000 and operating until April 2000 as an e commerce site; · in the circumstances Vodafone Pty Ltd and Mobile entered into an agreement on the terms of the 8 March 2000 letter ["Web site Agreement"]; · it was a term of the Website Agreement that Vodafone Pty Ltd would pay Mobile: - for developing the E-Commerce platform (clause 2); - for all hosting and communication costs for the E-Commerce platform (clause 5). · that it has not been paid, or paid in full, for the relevant costs; · that its damages amount to $222,487 made up: (a) staff salaries: $114,341 (b) internet access $22,562 installation of second firewall at Vodafone's request: $85,584. 78 Vodafone's case is that: · the letter of 8 March 2000 made plain that Mobile's costs were to be no greater than $430,000 for the development and customisation of phase 1 functionality; · the letter made plain that hosting and communication costs would be charged to Vodafone Pty Ltd at cost price; · Vodafone Pty Ltd in about May 2000 paid the sum of $430,000 to Mobile for services performed in developing a web site for Vodafone; · sufficient or proper details of Mobile's hosting and communication costs have not been provided to Vodafone Pty Ltd. 79 Vodafone put the matter as follows in overview submissions: · MI entered into an agreement with Vodafone by letter dated 8 March 2000 to develop and administer an E-commerce platform for Vodafone. Under that agreement, MI agreed to develop and customise the E-commerce site to the stage of "Phase 1 functionality" for which it was paid the agreed sum of $430,000 by Vodafone. · Under the terms of the letter Vodafone agreed to pay all hosting and communication costs for the portal at cost price. MI claims to have demanded payment for these further moneys. Vodafone says that no sufficient or proper details of the alleged hosting and communication costs have been provided to it to enable Vodafone to consider any claim and make a payment. 80 The cross-examination of Mr Stonell in relation to this claim is to be found at transcript 724 and following. June 2001 Quarter [Claim 4] 81 Mobile's case is that: · on or about 6 April 2001 Vodafone and it agreed a business plan for the June 2001 Quarter [the Agreement is said to be set out in an exchange of correspondence dated 5 April 2001 and 6 April 2001]. · particular matters were integral parts of the business plan for the particular Quarter including the following: - that the target level for new subscribers was 14,150 - that Vodafone would provide Mobile with: (i) a new $15 call Plan with tariff rates equivalent to those offered on the MC 9 Plan (ii) branding guidelines for marketing under the Vodafone Direct brand, pursuant to clause 25.3 (iii) information relating to Vodafone's Affinity programs · none of these were provided as promised; · for these reasons Vodafone is in breach of: - Clause 43 of the ASP - the co-operation term - the good faith term. 82 In its Overview submissions which in terms of damages clause were slightly moved away from in final submissions, Mobile put the matter as follows: · As a consequence of Vodafone's changed business strategy there were lengthy negotiations over the June 2001 quarter target and CTA before a business plan was agreed in early April 2001. The agreed business plan had a target of 14,150 customers, 2,300 of which were to be acquired using a combination of a new $15 plan, Vodafone Direct marketing and Affinity program marketing. · MI alleges that, in breach of both and express and implied terms of the ASP Agreement, Vodafone failed to provide the $15 plan, branding guidelines to enable MI to engage in Vodafone Direct marketing or Affinity programs so as to enable MI to meet the target. As a consequence MI connected only 10,475 new connections. The legal issues · The principal issues: (a) the existence of the implied terms contended for (paragraphs 12 and 13 of the Second Further Amended Summons) (b) whether Vodafone's conduct breached such terms and/or clause 43 of the ASP Agreement. · As to the implied terms, MI relies amongst others on Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Bros Pty Ltd v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91; Alcatel Australia Ltd v Scarcella & Ors (1998) 44 NSWLR 349; Burger King Corp v Hungry Jacks Pty Limited [2001] NSWCA 187. · Other useful decisions prayed in aid by MI include: Warren & Co v Agdeshman (1922) TLR 588; Turner v Goldsmith [1891] 1 QB 544; Ogdens, Limited v Nelson [1905] AC 109; B&M Readers' Service v Anglo Canadian Publishers Pty Limited [1950] Ontario Reports 159 (Court of Appeal); Culina v Giuliani 22 DLR (3d) 211 (Supreme Court of Canada); . The damages claim · MI claims $501,574 [Gower 2 Annexure B-0 (updating Gower 1 para 124] made up as a combination of [Gower 1 para 95 – 125]: (a) the lost BAM on the 3,675 customers targeted but not connected (b) the lost CTM during the June 2001 quarter on the 3,675 customers targeted but not connected (c) the net present value as at 1 July 2001, for the period from 1 July 2001 to 30 September 2008, of the lost future CTM on the 3,675 customers targeted but not connected. Vodafone's case 83 Vodafone's case is that: · the Vodafone Network's letter dated 3 April 2001 formed part of an agreed business plan for the June Quarter; · the agreed target level for new subscribers in the subject business plan for that quarter was subject to further amendment said to be agreed to by Mobile on 25 May 2001; · the amendments to the business plan for the subject quarter included the removal from the business plan of any sales of Mobile's proposed $15 Plan. 84 In its Overview submissions Vodafone put the matter as follows: · MI alleges that Vodafone breached the cooperation term and the good faith term by failing, between April and June 2001, to provide MI with: a. A new $15 call plan; b. Branding guidelines for marketing the Vodafone Direct brand; c. Information relating to Vodafone's Affinity programs. $15 Plan · The $15 Plan was proposed by MI to Vodafone on 29 March 2001. This plan was proposed by MI, even though Vodafone had previously told MI that it wished MI to concentrate on higher value plans of $17 per month or more. [Statham, 02.09.02, para 24] Vodafone did not agree to the plan as presented in its response on 3 April 2001. MI has acknowledged that the $15 Plan required approval from Vodafone before it could be marketed. [Mr Marchbank, 22.05.02, para 109(a)]. MI's acknowledgment reflects clause 8.1 of the ASP Agreement which makes Vodafone "solely responsible for determining the tariff for Mobile Services". In any event, the $15 Plan was reduced by agreement from the June quarter business plan. Vodafone Direct branding guidelines · During the period January to May 2000 there was some discussion between Vodafone and MI about the use of a marketing strategy called the "Vodafone Direct" brand as an alternative to the MI brand. MI in fact commenced marketing the Vodafone Direct brand and achieved 334 connections during the June 2001 quarter and 791 connection in the following quarter without being troubled by the allegation now made about non-provision of any branding guidelines. [Stonell, 25.06.02, para 59,61] Vodafone Affinity programs · MI alleges Vodafone should have provided information to enable it to market to Vodafone's affinity partners. However, MI had no agreement with Vodafone which obliged Vodafone to share any such information with MI. Nevertheless, MI still concluded two Vodafone affinity partner programs, with NRMA and Bankers Trust, which achieved 4 connections. [Statham, 02.09.02, para 30(d)] MI's complaint appears to be that Vodafone should have acquired more affinity partners which it could then make available to MI. · There is no basis for MI's allegation of breach of any duty by Vodafone in respect of these three matters. September 2001 Quarter [Claim 5] 85 Mobile's case is that: · prior to 13 July 2001 it attempted to negotiate with Vodafone, including by providing a proposed business plan, with a view to agreeing a Business Plan for this quarter; · during the negotiations Vodafone failed to agree an Estimated Acquisition Cost under clause 17.2 or a business plan under clause 21 for the Quarter in question; · in those circumstances Vodafone failed to: (a) use its best endeavours to agree a business plan for the September Quarter, in breach of clause 21.1; (b) take all steps and do everything reasonably required to agree a business plan for the September Quarter, in breach of clause 43; (c) do whatever was necessary to be done on its part to enable MI to have the benefit of the ASP Agreement, in breach of the cooperation term; (d) act in good faith and reasonably in attempting to agree a business plan for the September Quarter, in breach of the good faith term. · in those circumstances the parties failed to agree on a business plan for the September Quarter prior to seven days before the commencement of that quarter; · pursuant to clause 32.1 on 13 July 2001 Mobile gave notice of a dispute which had arisen under clause 21.3 in terms of the failure to agree on the subject business plan for the September Quarter; · in breach of clause 32, Vodafone refuse to engage in the dispute resolution process; · for those reasons Vodafone is in breach of: - Clause 43 of the ASP - the co-operation term - the good faith term. 86 In its Overview submissions Mobile put the matter as follows: · Negotiations for the September 2001 quarter CTA commenced in May 2001 when Vodafone set a target of 9,000 for the quarter. As a consequence of this significant reduction in target from previous levels, MI resolved to retrench staff. · MI submitted several business plans, subject to various conditions, including that Vodafone bear MI's redundancy costs and that Vodafone commit to providing marketing tools necessary to make the targeted sales. Vodafone did not accept the conditions. MI alleges that no business plan was agreed for the September 2001 quarter. The issues · The issues are: (a) whether the business plan was not agreed (as asserted by MI) or agreed (as asserted by Vodafone – by denial of the allegation that it was not agreed (Defence para 29)); and (b) if not, whether Vodafone breached the express or implied terms pleaded being the good faith and cooperation terms and clauses 21.1 and 43 of the ASP Agreement. · The particulars of the breach are pleaded in paragraph 30 of the Second Further Amended Summons. The damages claim · MI proceeded to seek customers during the September 2001 quarter but connected only 1,509. · MI claims damages as a combination of [Gower 1 para 126 – 142]: (a) the lost BAM on the customers who ought to have been targeted (b) the lost CTM during the September 2001 quarter on customers who ought to have been targeted (c) the net present value, as at 1 October 2001, for the period from 1 October 2001 to 30 September 2008, of the lost future CTM on the customers who ought to have been targeted (d) costs relating to the redundancy of staff during the September 2001 quarter, which Vodafone has refused to reimburse as part of CTA ($310,179). · The quantum of the claim depends upon what assumption is made as to the number of connections which ought to have been targeted during the September 2001 quarter. Mr Gower has made assumptions of [Gower 1 para 94]: (a) 12,000 (4,000 per month) – number for calculating minimum BAM in ASP Agreement (b) 18,000 (6,000 per month) – average number acquired connected by MI over the life of the ASP Agreement (c) 24,000 (8,000 per month) – number of customers originally advised to MI. · On the different assumptions the quantum of the claims is [Gower 2 Annexure B-0 (updating Gower 1 para 141)]: Target 12,000 18,000 24,000 Loss $1,749,101 $2,572,048 $3,394,994 Actual Acquisition Costs for the September 2001 Quarter 87 Mobile's case is that: · on 24 October 2001 it submitted to Vodafone a Schedule of its Actual Acquisition Costs related to the September Quarter, including its redundancy costs incurred as a result of its having made several of its employees redundant between 27 July 2001 and 31 January 2002; · in breach of clause 17.6, Vodafone did not pay the Actual Acquisition Costs for the September 2001 Quarter. Vodafone's case 88 Vodafone's case is that an agreement on the business plan for the September Quarter was in fact reached on 18 June 2001 , notice of which agreement was formerly confirmed by Vodafone network by letter dated 20 June 2001. 89 In its Overview submissions Vodafone with the matter as follows: · There is a dispute whether there was an agreement between Vodafone and MI in relation to the business plan for the September 2001 quarter. Vodafone says that it agreed to the business plan proposed by MI on 20 June 2001. · MI purported to invoke the dispute resolution procedure under clause 32 of the ASP Agreement on the basis of an alleged failure to agree to the September 2001 business plan. However, MI had no entitlement to do so, because the business plan had been agreed. After Vodafone indicated that this was its position, on 18 July 2001, MI took no further steps to effect the dispute resolution procedure under clause 32 of the ASP Agreement. · The true position appears to be that MI decided to cease incurring marketing expenditure because it could not or would not meet the agreed target level for the quarter. [Mr Marchbank, 22.05.02, para 142] Instead, MI has sought to blame Vodafone for this state of affairs by reference to Vodafone's alleged failures in relation to the $15 Plan, Vodafone Direct branding guidelines and the Vodafone Affinity program issues (see Issue 1 above). · MI also alleges that Vodafone refused to enter into discussions about allowances for MI's redundancy costs which it said were consequent upon Vodafone's proposed reduced target level for new subscribers. MI first raised the question of seeking reimbursement from Vodafone for its redundancy costs in June 2001 and was told that Vodafone would not agree to meet these costs. MI's response was to refuse to agree to the Estimated Acquisition Costs for the September quarter budget. [Mr Marchbank, 22.05.02, para 129] · MI had no entitlement to have the redundancy costs included in the Estimated Acquisition Costs, because they were not costs of acquiring customers but were costs of MI restructuring its business. Accordingly, there is no foundation for MI's allegation that Vodafone was in breach of any obligation to it in respect of its redundancy costs. December 2001 Quarter [Claim 6] 90 Mobile puts its case as follows in its Overview submissions: · On 23 July 2001 Vodafone informed MI that the target level for the December 2001 quarter was nil. No business plan or CTA schedule was negotiated. · MI alleges that Vodafone is not permitted to set a nil target under the ASP Agreement. The construction issue · Central to this claim and to the proceedings is the construction and operation of the ASP Agreement and whether as a matter of pure construction "nil" could ever be a target within the meaning of that term. · The term "target" implies a goal to be achieved by doing something. Nil is achieved by inertia. · The construction contended for by MI renders the agreement meaningful and workable whereas Vodafone's construction denudes it of efficacy. · There are numerous reasons why the setting of a nil target is inimical to and impermissible under the agreement: (a) the agreement is to perform "Acquisition Services" – a nil target is counter to the notion of performing services (cl 5.1(a)) [TB 147] (b) the formulas in the definitions of "Estimated Acquisition Fee" and "Estimated Acquisition Cost" do not operate with a nil target (c) the setting of a nil target is contrary the various indicators in the agreement that MI is obliged to operate its business efficiently [TB 140, 145, 147, 157] · The idea that MI was to stagnate cannot have been the intention of the parties, objectively construed, especially given that the agreement was entered into against the background of a public listing which touted the prospects for growth based on the agreement. The prospectus is at TB378. The implied term of good faith and cooperation · It is submitted that the Court will have no difficulty in implying the terms contended for (see paragraphs 59 and 60 above). The damages claim · MI actually connected 16 new subscribers during the December 2001 quarter, responding to earlier promotions. · MI claims damages as a combination of [Gower 1 para 144 – 162]: (a) the lost BAM on the customers who ought to have been targeted (b) the lost CTM during the December 2001 quarter on customers who ought to have been targeted (c) the net present value, as at 1 January 2002, for the period from 1 January 2002 to 30 September 2008, of the lost future CTM on the customers who ought to have been targeted (d) actual overhead costs associated with assets acquired by MI to carry out acquisition activities and which continue to be incurred notwithstanding acquisition activities did not take place during the quarter ($1,117,980). · As for the September 2001 quarter, the quantum of the claim depends upon what assumption is made as to the number of connections which ought to have been targeted during the December 2001 quarter. · On the different assumptions Mr Gower has made the quantum of the claims is [Gower 2 Annexure B-0 (updating Gower 1 para 161)]: Target 12,000 18,000 24,000 Loss $2,244,335 $3,073,764 $3,903,193 Vodafone's approach to the Quarters for March, June, September and December 2002 91 Vodafone in its overview submissions regards these issues as concerning its determination of a nil target for connections in each of these quarters and submit that similar questions to those raised in relation to the September 2001 quarter by raised here. Retention Funding Dispute [Claim 8] 92 During final submissions Mobile withdrew its claim to an oral agreement that retention funding would be provided hence restricting its claim to a lost chance of procuring such funding. 93 In its overview submissions Mobile put its case as follows: · MI alleges that Vodafone is obliged to continue to provide retention funding to MI in order to permit it to undertake the retention activities and handset upgrades required by the ASP Agreement. · Traditionally mobile customers signed on to fixed contracts (say, 24 months). A number of MI's plans were fixed contract plans. Often customers churn, that is elect not to continue with their service provider, at the end of a contract and to sign up with another service provider. Service providers engage in retention activities (by offering incentives such as cheap handset upgrades) to retain customers. The success of retention activities is measured by a "winback" ratio, namely the ratio of customers who sign a new contract as a proportion of those out of contract [Gower 1 para 52 – 56] · Prior to March 2001 Vodafone provided funding to MI to enable it to carry out retention activities. In March 2001 Vodafone severely restricted both the amount of retention funding and the conditions on which it could be used, resulting in MI's winback ratio dropping significantly. · In October 2002 Vodafone, by imposing conditions on the use of retention incentives which were inappropriate for MI customers, effectively withdrew all retention funding from MI. · MI claims that Vodafone was not entitled to reduce retention funding and place conditions on its use in the manner in which it did in March 2001 and October 2002. The damages claim · MI claims the lost future CTM for the customers it would have retained if Vodafone had continued to provide retention funding [Gower 1 para 264 – 270; Gower 2 para 16 –33]. Because the loss of retention funding affected MI's ability to retain customers other than those not on plans (eg V.mobile) the quantum of this claim is affected by each dispute other than the MC9 dispute, the V.mobile dispute, the website dispute, the X4 dispute and the repudiation dispute. · On the assumption that MI was successful on all disputes which affect the quantum of the retention dispute, and on the different assumptions Mr Gower has made as to targets which ought to have been set, the quantum of the claim is [Gower 2 para 7 (updating Gower 1 para 8 and 270)]: Target 12,000 18,000 24,000 Loss $6,776,34 $7,594,137 $8,531,935 94 In its Overview submissions prepared before Mobile withdrew its claim to a contractual right to retention funding Vodafone puts its case as follows · The Management Services to be provided by MI under the ASP Agreement included retention activities, ie. retaining customers once the terms of their initial plan had expired. This was put beyond doubt by cl.2.2(e)(i) of the Amendment Agreement. A significant aspect of retention of customers involves the cost of upgrading a customer's handset, which MI has the sole responsibility to meet under clause 8.2 of the ASP Agreement. · Since the commencement of the ASP Agreement, Vodafone has provided funding to MI to enable it to undertake retention activities. There is no provision in the ASP Agreement obliging Vodafone to pay any such funding to MI. Vodafone has, from time to time, altered the conditions upon which it was prepared to make such funding available to MI, which reflect policy decisions made by Vodafone about its business and objectives from time to time. In recent years, Vodafone's policy has been to limit the availability of retention funding to higher value customers only. · MI seeks to elevate the retention funding arrangements into a contractual right, and to assert that Vodafone is in breach thereof by altering its retention funding policies: a. MI's allegation that there was a "Retention Agreement" [SPC paras 20] involves an oral variation to the ASP Agreement, contrary to cl.45 of the Agreement. This alleged agreement is also contradicted by the failure of the parties to include any such agreement in the Amendment Agreement. b. MI's allegation of a breach of the duty of cooperation and good faith is misconceived. As the retention funding arrangements occurred outside the contract, these duties have no application to those arrangements. · The allegations in SPC para 23A and 23B are irrelevant. Nothing in the ASP Agreement affects Vodafone's relationship or the arrangements which it might choose to make with its other service providers. This is clear from the non-exclusive nature of MI's appointment as a service provider (except in relation to Mobile Direct Marketing Operations as provided for in clause 2.7). [cl. 2.3] · Further, the Churn benchmark in clause 1 of Part A Schedule 1 to the ASP Agreement has nothing to do with any alleged arrangements, policies or standards concerning Vodafone's retention policy. Schedule 1 and clause 11.2 to which Schedule 1 relates, is an obligation upon MI to satisfy certain performance standards for Vodafone's benefit rather than creating any obligation upon Vodafone. 95 Vodafone in its defence admits that it has changed the criteria for determining which subscribers to its network qualified for retention funding in the relevant period. Direct Marketing (X4) dispute [Claim 9] 96 Mobile puts the matter as follows in its Overview submissions: · At various times since July 2001, and as late as November 2002, Vodafone has permitted other service providers to engage in direct marketing operations in breach of the exclusive dealing arrangement it has with MI. · In particular Vodafone entered into a Service Provider Agreement with X4 Pty Limited on 30 June 2000. The relief sought · MI seeks: (a) an injunction restraining Vodafone from continuing to do so (b) MI claims $69,813 [Gower 2 Annexure B-0 (updating Gower 1 para 262)], made up as a combination of [Gower 1 para 241 – 263]: (i) the lost BAM on the assumption of 300 customers connected by X4 during each of the years ended 30 June 2001 and 30 June 2002 (ii) the net present value, as at 1 July 2000, for the period from 1 July 2000 to 30 September 2008, of the lost future CTM on the assumed 600 customers. 97 Vodafone in dealing with each of the activities of X4 Pty Ltd, [Housing Industry of Australia] and Vodafone, puts the matter as follows in its Overview submissions: · MI has alleged that the activities of X4 Pty Ltd, [Housing Industry] and Vodafone have been conducted at various times which constitute a Mobile Direct Marketing Operation in competition with MI, in breach of clause 2.7 of the ASP Agreement. · Mobile Direct Marketing Operation is defined in clause 1.1. These operations comprise a distinct sub-set of all advertising operations, which are concerned with the receipt of customer orders in direct response to the placement of particular advertising. · The exclusivity provision in clause 2.7 of the ASP Agreement only prohibits Vodafone from appointing of dealing with a service provider that acquires customers solely by means of direct marketing. · X4 and Housing Industry are not service providers and there is no evidence that those companies acquire customers solely by means of direct marketing. Clause 2.3 makes it clear that Vodafone is not prevented from itself using direct marketing. The plaintiff's claims are premised on a misconceived notion that only MI can use direct marketing to acquire customers for Vodafone. Repudiation [Claim 10] 98 Particular conduct concerning: · an alleged change by Vodafone between July and October 2002 of the criteria for handset upgrade subsidies concerning the nil determinations; · allegations that in late July 2001, X 4 Pty Ltd, either individually or in conjunction with Vodafone, or a group member, was involved in activities constituting the conduct of a mobile direct marketing operation in competition with Mobile in breach of Clause 2.7 of the ASP Agreement and/or in breach of the co-operation and good faith clauses; · allegations that in late March, 2002 TeleOne Pty Ltd, either individually or in conjunction with Vodafone or a group member, was involved in activities constituting the conduct of a mobile direct marketing operation in competition with Mobile in breach of Clause 2.7 of the ASP Agreement and/or in breach of the co-operation and good faith clauses; · allegations that in November 2002, Vodafone or a group member, placed certain advertisements which comprised activities which constituted conduct of a mobile direct marketing operation in competition with Mobile in breach of Clause 2.7 of the ASP Agreement and/or in breach of the co-operation and good faith clauses; are pleaded as constituting a repudiation of the ASP Agreement by Vodafone. 99 Mobile in its Overview submissions puts its case as follows: · MI claims that Vodafone has evinced an intention not to be bound by the ASP Agreement. Both the singular and cumulative effect of particular aspects of its conduct establish this compellingly. This repudiation has given rise to an entitlement on the part of MI (should it so elect – which it has not yet done) to bring the ASP Agreement to an end and seek damages for loss of its bargain: Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 628ff; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260. · MI relies on the following events, either individually or collectively, as evidencing repudiation by Vodafone of the ASP Agreement: (a) the setting of a nil target for the December 2001 quarter (b) a statement on 2 August 2001 by Mr Maher, the Managing Director of Vodafone Plc's operations in Australia, that all future targets would be set at nil (c) the setting of nil targets for the March and June 2002 quarters and the failure to set a target for the September and December 2002 and March 2003 quarters (d) Vodafone permitting other service providers to engage in direct marketing (e) Vodafone effectively removing retention funding with the result that MI can no longer engage in retention activities. The relief sought · MI claims a declaration that Vodafone has repudiated the ASP Agreement. 100 Vodafone deals with the matter as follows in its Overview submissions · `MI seeks to put a further characterisation of its claim that Vodafone was in breach of the ASP Agreement by setting a nil target level for new connections. If, as Vodafone submits, it committed no breach of the agreement, the question of repudiation does not arise. · Alternatively, if it is found that Vodafone's determination of a nil target level for new connections was in breach of the ASP Agreement, no question of repudiation arises. This is because MI has elected to affirm the ASP Agreement by its continued acceptance of the minimum Base Acquisition Margin payments that have been paid to it by Vodafone in accordance with clause 18.3 of the ASP Agreement. The acceptance of these moneys represents an affirmation of the ASP Agreement in accordance with the principle in Sargent V ASL Developments Ltd (1979) 131 CLR 634 and Immer (No.145) Pty Limited v Uniting Church of Australia Property Trust (NSW) (1993) 182 CLR 26. Interest 101 Mobile put its case as follows in its Overview submissions: · MI claims interest on each Claim on which it is successful from the date the claim arose until judgment pursuant to s94 of the Supreme Court Act. · As is apparent from above, the various claims for past losses arose on various dates. Further, the claims for future losses are calculated to arrive at a net present value at various times. The evidence General test of objectivity 102 The judgment below makes plain in dealing with the construction issue that the approach taken for obvious reasons is that the general test of objectivity is pervasive: cf Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 per Gleeson CJ, citing Lord Diplock in Gissing v Gissing [1971] AC 886 and in Ashington Piggeries v Christopher Hill [1972] AC 441 at 502. 103 Parties to a written contract clearly cannot outflank the parole evidence rule by suggesting that the Court may be assisted in construing a written agreement by resort to the parties' prior negotiations. Those negotiations, save to the extent that they tend to establish objective background facts which were known to both parties and the subject matter of the contract, are not admissible on the construction issue. They are not receivable insofar as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations. As Mason J points out in Codelfa, such statements and actions may reveal the terms of the contract which the parties intended or hoped to make - but are superceded by and merged in the contract itself. 104 This case is a very good example as it seems to me of Lord Wilberforce's words: "It may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get "agreement" and in the hope that disputes will not arise. The only course then can be to try to ascertain the "natural "meaning. Far more, and indeed totally dangerous is it to admit evidence of one parties objective -- even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised ." [Prenn at 1385 ] [emphasis added] 105 To my mind the present is a very good example of why the court is so constrained in its ability to look at prior negotiations for the purpose of construing a written document. Statements of the parties during negotiations which are reflective of their actual intentions and expectations are not receivable. The parole evidence rule excludes such statements. The court searches for the objective framework of facts within which the contract came into existence, and for the parties presumed intention in this setting. Approach to the evidence adduced 106 Both parties mobilised a substantial body of evidence covering both: · facts matters and circumstances occurring during the period prior to the execution of the ASP Agreement ["pre-contractual communications & c."]; and · facts matters and circumstances occurring following the execution of the ASP ["post-contractual communications &c."]. Pre- contractual communications 107 On the occasion of the taking of initial objections to evidence it was made plain by both parties that they accepted the general principles laid down in Codelfa giving the most limited windows of opportunity in terms of pre contractual communications being admissible as relevant to construction issues. Notwithstanding that this was the case and particularly by reason of the width of the matters which may be taken into account in relation to the good faith issue, it was submitted by both parties that the proper course was to admit this evidence and to permit both parties during final address to be precise insofar as they may seek to suggest how, when and why, particular pre-contractual materials should be regarded as going to contractual construction issues. 108 In the result no such submissions came forward. For that reason the very detailed evidence given and concerning pre-contractual communications &.c is given only limited attention in these reasons. Of course the factual matrix in which the parties were placed at the time they entered into the ASP Agreement insofar as objectively known by both parties is taken into account and to the extent relevant receives mention. Contracts are now to be considered in their factual and legal context Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 – 914 per Lord Hoffman, cited with approval by Gleeson CJ, Gummow and Hayne JJ in Magbury Pty Ltd v Hafele Australia Pty Ltd (2001) 185 ALR 152 at 155, 163; cf Wilson v Anderson (2002) 190 ALR 313 at [9] per Gleeson CJ. As Lord Wilberforce said in Prenn v Simmonds [1971] 1 WLR at 1383 – 1884: "The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-literal, tendencies, for Lord Blackburn's well-known judgment in River Wear Commissioners v Adamson provides ample warrant for a liberal approach. We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v Longbottom) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term". 109 But the extensive communications between the parties as to what they were endeavouring to achieve through the negotiations, and the negotiations themselves, have no part to play in the construction of contract and it is a particularly arid exercise to repeat that material in the body of the judgment. Exhibit xx 110 The more convenient course is to utilise materials conveniently put together by the defendant by way of a folder which, across more than 100 pages, sets out respectively the competing versions of both pre-contractual as well as post contractual conversations. That folder will be regarded as part of this judgment by way of a separate appendix ["appendix XX"]. If and insofar as evidence admitted concerning pre-contractual communications &.c has a relevance to causes of action other than contract, that evidence will be referred to for obvious reasons. The detailed conversations which are accepted or rejected can be located in this appendix. 111 It is relevant to note that many of the pre ASP conversations dealt, as one would expect, with the close examination of costing models and the like, for the reason that what was being proposed in essence involved the transfer of Mobile's customer base to Vodafone, and Mobile in that regard, looking to the new ASP to give it sustainable profitability over many years. Hence the discussions involved all sorts of parameters including for example questions of whether a maximum number of customers that Mobile could acquire in any given month should be stipulated. Mr Bramwell gave evidence complementing his affidavit evidence that in one conversation Mr Maher made clear that whatever Mobile's view of the value of the subscriber base was, Vodafone would only be prepared to buy it at a certain value and that Mobile should look to the value of the future contract to make up any perceived shortfall. 112 Other matters including questions of targets, costs and the parties' respective approaches to what was intended to be included in the ASP were discussed. It is however the ultimate written document which is construed and this is not a case in which it is capable of being construed by reference to anterior negotiations. Post-contractual communications 113 In relation to post contractual communications &c. the matter is somewhat more complex particularly as: · a limited number of the cases litigated turn on alleged oral conversations and binding agreements said to have been entered into somewhat informally; and · questions of fact are obviously enlivened in relation to issues thrown up for example by the good faith or cooperation causes of action and by the estoppel cases put by Vodafone. Such questions are obviously also of significance in relation to the breaches of contract and repudiation issues. 114 In view of the acceptance by the New South Wales Court of Appeal in Hungry Jacks of the proposition that good faith and reasonableness are to be seen as one concept, an enormous amount of the focus of the parties during the cross-examination of witnesses went to what could be seen to be reasonable or unreasonable conduct during the course of the internecine disputations between them through the whole of the period of the ASP. That those disputes involved any number of parameters and traveled through regular suggestions of proposed changes to the ASP and regular suggestions that one party or the other had breached understandings, makes it very difficult to follow the evidence. One only of the examples of the areas cross-examined on and treated with in the evidence concerns the recurrent competitive considerations in relation to the success of marketing, for example, by offering free handsets, free call time, value added plans and the like. These are the types of business considerations which usually include subjective perceptions and in respect of which many diverse opinions may legitimately be held. 115 It is to be expected that in a close business relationship there will be any manner of accommodations achieved where parties do not, lawyer in hand, spend all of their time reaching for the constituent document such as the operative agreement where joint ventures or partnerships are entered into. But here from time to time there was a reaching for the ASP and often, simply frustration with the perceived lack of understanding of each party for the others point of view. 116 The challenge in relation to the vast volume of evidence is to keep the central structure and fabric of the pleadings in mind. Reasonableness is a difficult subject to adjudicate in any event. It is more difficult than ever when one is involved in assessing the conduct of businessmen and companies in a dynamic market where ever pressing competition requires to be treated with and where the particular perceived interests of the parties who were locked together by the ASP, were seen to be radically and probably diametrically opposed. 117 Hence the clear necessity to tread carefully and where relevant reasonably comprehensively with fact-finding in the post ASP Agreement period. But even here it has to be borne in mind that the parties because of their close day-to-day working connection had occasion to have voluminous communications concerning not only business plans, but all manner of matters basic to the ongoing conduct of a business. The court made plain, to the parties on the occasion when the whole of the agreed bundle was admitted into evidence that only documents which received express reference would be read. Notwithstanding this having been made plain there remained very many documents which were not referred to at all. No doubt this is because they have absolutely no, or only the most peripheral, relevance to the issues in the way in which they were ultimately litigated. In like fashion a great deal of the affidavit/statement materials which went into evidence dealt with ongoing business communications between the parties at many levels and here again have absolutely no, or only the most peripheral relevance to the issues in the way in which they were ultimately litigated. For obvious reasons the judgment even though treating with a substantial body of evidence, does not deal with or attempt to deal with evidence of this nature. Matrix of facts objectively known to both parties against which the ASP was executed 118 The evidence clearly established the following facts matters and circumstances objectively known to both parties and against the background of which the ASP was entered into: · the terms of the anterior GSM Service Provider Agreements; · the proposed flotation of Mobile; and · the fact that Vodafone's financial year ended on 31 March. [Transcript 25] Dramatis personae 119 The convenient course is to commence by identifying in general terms the lay witnesses who not only made affidavits but were cross-examined. Mobile Innovations witnesses: Mr Bramwell 120 During the period between March 1994 and 1 July 2000 Mr Bramwell was the chief executive officer and a director of Mobile. He was succeeded by Mr Marchbank as chief executive officer on 1 July 2001 although during the period between about January 2000 and 30 June 2000 during the transition and takeover period, Mr Marchbank was reasonably heavily involved with Mr Bramwell also participating. Mr Bramwell is currently a non-executive officer of Mobile Innovations. Mr Marchbank 121 Mr Marchbank joined Mobile at the commencement of 2002 having been for a period of approximately two years before that, the managing director of the mobile division within Telstra. Mr Shaw 122 Mr Shaw was a director of Mobile and also a director of Innovations Direct Pty Ltd [apparently renamed, or originally named, Innovations Mail Order Ltd] ["Innovations"]. [Transcript 732] He was a non-executive director of Mobile from 1997 through to 2003. He assisted Mobile in its marketing activities. He gave evidence in relation to a Marketing Agreement as well as a Consultancy Agreement each of which had been entered into between Innovations and Mobile. Mr Ralph Stonell 123 Mr Stonell is the Chief Financial Officer and Company Secretary of Mobile Innovations Limited. Mr Stonell commenced his employment with Mobile in that position in November 1996. 124 Mr Stonell was involved in the negotiations for the ASP Agreement. After the ASP Agreement was signed one of Mr Stonell's principal responsibilities related to the preparation of the estimated and actual CTA under the ASP Agreement. Mr Stonell was also involved in other transactions in issue including the retention funding issue; the V. Mobile Plan; the $9 call plan and had a limited involvement in the Website Agreement. He prepared a substantial amount of material which was provided to Mr Gower for the purpose of his preparation of his expert's report. Mr Steven Ikeda 125 Mr Ikeda is currently the Chief Information Officer for Mobile Innovations. Since commencing work at MI in July 1999, Mr Ikeda has held the following positions in the company: UNIX and Network Administrator from July to September 1999; Systems Development Manager from September 1999 to May 2000; IT Manager from May to August 2000; and August 2000 to the present Mr Ikeda has held the position of Chief Information Officer. 126 Mr Ikeda is responsible for planning MI's IT strategy and for overseeing the e-commerce component of MI's business. He gave very short evidence particularly concerning costs related to serving the Vodafone Direct WebSite including some detailed evidence relating to hosting and communication costs and the like. Ms Claire Statham 127 Ms Statham was the Sales and Marketing Manager for MI between 1994 and 31 July 2002 when she was retrenched from her employment at MI. Ms Statham was primarily responsible for the preparation of Cost to Acquire Worksheets and business plans under the ASP Agreement. Mr Ilkka Tales 128 Mr Tales commenced his employment with Mobile on 1 October 2000 as the General Manager, Distribution and Business Development. Mr Tales was appointed Chief Executive Officer of Mobile on 1 April 2002. Mr Tales is currently the Chief Executive Officer. His role in terms of involvement with the Vodafone contract was relatively limited. He recalled on some occasions receiving requests from Vodafone for advertising schedules. He was asked a number of questions about certain plans and was the recipient of the document [PX 1330z (xxxi). This was the letter inviting Mobile to provide Vodafone with a proposed business plan for acquiring customers. He recalled that no such plan was ever provided. Vodafone witnesses: Mr Julian Ogrin 129 Mr Ogrin was employed by Vodafone Pty Limited from March 2000 to July 2001. Mr Ogrin held the position of General Manager of On-line and Direct Sales until he was appointed as General Manager of Business Development and Planning in about October 2000. Mr Christopher Wisbey 130 Mr Wisbey was the Business Manager Service Providers for Vodafone Pty Limited between January 2000 and March 2001 when he ceased his employment at Vodafone. Mr Wisbey's role was to manage the operational and commercial aspects of Vodafone's relationship with MI. Mr Todd Buckley 131 Mr Buckley was the Channel Marketing Manager for Service Providers for the period between 8 November 1999 and about November 2002. As Channel Marketing Manager for Service Providers, Mr Buckley was responsible for supervising marketing campaigns conducted by Vodafone's service providers, developing new brands to be used by Vodafone's service providers in marketing and approving particular advertisements to be used by Vodafone's service providers. Ms Jayne Blake 132 Ms Blake is currently the General Manager, Finance of Vodafone Network Pty Limited. In November 1996 Ms Blake was appointed General Manager Finance for Vodacall Pty Limited (a wholly owned subsidiary of the Vodafone group of companies). In April 1998, following the merging of Vodafone's service provider companies into Vodafone Pacific, Ms Blake was appointed General Manager SP Finance for Vodafone Pacific. Ms Cindy Moussa 133 Ms Moussa commenced her employment with Vodafone Pty Limited in about September 1998. In May 2000 Ms Moussa was appointed as a Business Support Analyst in Vodafone's Finance Department. Ms Moussa currently holds the position of Financial Analyst. 134 Ms Moussa is responsible (and was responsible in her former role as Business Support Analyst) for calculating payments to be made to MI by Vodafone; tracking MI's performance against benchmarks contained in the ASP; analysing Mobile's monthly reports; collating and preparing Vodafone's monthly Service Provider Report on Mobile; and providing to Mobile information derived from Vodafone's telecommunications network. Ms Moussa has also been involved in reviews of the CTM and BAM payable to Mobile. Mr Paul Stormon 135 Mr Stormon was employed by Vodafone Pty Limited as the National Manager of Direct Marketing and On-Line Sales from 17 October 2000 to 25 May 2001. 136 Mr Stormon's role was to manage Vodafone's direct marketing sales channels and to achieve sales through forms of direct marketing including press, direct mail, radio, television and the internet. Mr Stormon was responsible for the day-to-day management of the relationship between Vodafone and Mobile. Mr Grahame Maher 137 Mr Maher is currently the Managing Director of Vodafone Plc's operations in Australia. This appointment was effective from 1 September 2001, although Mr Maher was doing work in that role prior to 1 September 2001. He is also a director of Vodafone Pacific Limited and Vodafone Network Pty Limited. Mann Made Marketing Pty Ltd 138 This company was engaged to provide marketing consulting services to Mobile over particular periods of time. Mr Marchbank gave the following evidence in this regard: "The consulting consisted of really, I guess, checks and balances from our perspective because we had a direct marketing manager, Ms Claire Statham and she was an expert and had a lot of experience in the field of mobile direct marketing and had been with Mobile Innovations for some period of time. However, one of our partner companies, Innovations, had used Mr Mann's consultancy in the past and it was recommended to me that we use him to provide, I guess, a sanity check to make sure, with all his experience, which I think was some 30 or 40 years in direct marketing, that all the right practices were being used." [Transcript 300] Affidavits or Statements read but not examined on Mark Nicholas Jones 139 The affidavit of Mr Jones, dated 13 February 2003, was read in court but was not the subject of cross-examination. 140 Mr Jones gave evidence of a telephone conversation he made on 14 November 2002 in response to a newspaper advertisement. The advertisement was advertising a Vodafone deal aimed at encouraging current Vodafone customers to connect their friends to Vodafone. 141 Mr Jones, during the course of the conversation asked the representative whether it was possible to purchase a mobile phone directly from Vodafone. The representative indicated that this was possible, and that if you were not already a customer of Vodafone: "To purchase a phone directly you have to do so by purchasing one on a 'no-plans' option. We will send the phone and SIM card directly to you. Once you activate the SIM card by ringing the 1800 number you can upgrade to a Business Choice Plan." [para 4] Cindy Moussa 142 The affidavits of Ms Moussa dated 6 December 2002 and 25 February 2003, were read in court but were not the subject of cross-examination. 143 Ms Moussa gave evidence about the billing systems and processes engaged in by Mobile and Vodafone to calculate the CTM for each month. Evidence was given about how Voadfone determined which subscribers attracted the higher CTM, including by reference to Vodafone's ISAACS system which captures information on customers connected to Vodafone's telecommunications network. 144 Detailed evidence explained how the CTM was calculated on the V.mobile and $9 plans. Expert evidence on damages 145 The Court received extensive assistance from the parties in terms of the reports painstakingly prepared by Mr Gower and by Mr Bryant. By reason of the careful and professional approach taken by the parties and by these experts to endeavouring to narrow the field of dispute, it has ultimately not been necessary for the Court to set out, save as and when strictly necessary, segments of these reports. Indeed counsel for Mobile did not seek to cross-examine Mr Bryant. 146 There is of course no issue as to the specialised knowledge which these two experts have in relation to the field in question. The Court acknowledges the assistance which the parties furnished to the Court in the approach which was taken to this evidence and of course acknowledges the conscientious approach taken by both experts in their examination of matters which were put to them for report. As so often occurs, most of the emphasis by the parties during the final hearing went to the validity and rigour of assumptions made by the experts, usually having been put to them for that purpose. The Evidence Targets set and plans sold 147 One of the endemic difficulties in dealing with the very close evidence adduced as to the parties communications with one another during the course of the ASP is to endeavour to follow what is the relevance of a lot of that material. Before chronicling the detailed evidence it is convenient to point up some of the structural matters later treated with in detail. 148 One thing is certain and that is that special focus was placed upon: · the targets which were set from time to time; · the reasons for the fixing of particular targets from time to time and the reasons why in relation to such targets (and also during periods of nil targets), Mobile asserts that it had particular difficulties in organising its business and in running its business. Whether those reasons involved breaches by Vodafone of the ASP becomes important; · the plans which Mobile tried to sell and in fact managed to sell from time to time-and in this regard whether and if so when, and why, Mobile can be said to have focused in the running of its business, on a high number of connections/growth. The sundry business plans which were sold 149 The detailed evidence concerning the dealings between the parties following entry into of the ASP often tended to focus upon the particular business plans: · which were being sold by Mobile; or · which Mobile desired should be made available to it; or · which Vodafone was pressing Mobile to sell; or · which one or other party was suggesting Mobile should be permitted or required to move to. The difficulty in actually following which plans were being sold led to the parties reaching a measure of agreement in terms of a Schedule which went into evidence as MFI 6 [see also MFI 15 which became Exhibit D7]. The convenient course is to append this Schedule to the judgment as appendix "F". 150 There were relatively few problems with respect to targets prior to the commencement of 2001. The particular targets have already been set out a in table from which it can be seen that they ranged from about 15,000 in the December 1998 quarter to about 28,000 for the December 2000 quarter. Statistics 151 Some of the proven facts, statistics and accepted figures in relation to these matters are as follows: · during the period from the commencement of the year 2000 until September 2001 there was initially, as far as Vodafone's requirements were concerned, a focus on a high number of connections and growth which then moved into a demand for a substantial reduction in connections; [Transcript 281] · during the same period from the commencement of 2000 until September 2001, Mobile attracted only an extremely small proportion of subscribers in the range of plans having access fees above $30; [Transcript 292] and · between January 2000 and May 2000 the largest number of $30 subscribers achieved by Mobile in any month was 4 percent of the total. [Transcript 282] Confusion factor 152 To my mind the evidence clearly established that enormous problems arose by reason of the vacillation within and lack of direction displayed by Vodafone on many occasions. The changeover to Network appears to have been the genesis of the problems occurring relatively early in the life of the ASP. [Transcript 283.15] Theme of the cross-examination of Mobile witnesses 153 The cross-examination of many of the Mobile witnesses had as its central theme the proposition that Mobile was in effect operating, leaving aside the question of management fees, on a cost plus basis, so that it did not particularly matter to it whether or not its costs were such that any return which Vodafone received was positive or negative: see for example Mr Marchbank [Transcript 284] in denying this proposition. 154 The proposition put again and again to Mobiles' witnesses was that Mobile simply never recognised that there was no point in Vodafone acquiring customers in respect of which it would lose money. 155 At the same time the cross examiner sought to press the proposition that if it was the fact that the view of Vodafone was that the Mobile direct channel was only producing subscribers which gave Vodafone a negative return, Vodafone was commercially justified in discontinuing the use of that channel [cf for example Transcript 284.20]. In Mr Marchbank's evidence he disagreed with this proposition and explained himself as follows: "A. No, I disagree. Q. Is that because of your particular view of the contractual arrangements between Vodafone and Mobile or for some other reason? A. Well, for the reason that you are making an assumption that the only thing that the channel can do is acquire new customers in a particular way and it was always my view that the channel would evolve with the company and relationship (sic) with Vodafone would evolve to a mature market reacquisition of the existing customer driving profitability from the existing base and also going to new segments of the market which direct marketing was ultimately suited for." [Transcript 284] Profitability of Mobile up to 1999 156 The cross-examination pursued the proposition that Mobile had never made a profit during any financial year from the time of its incorporation in 1994 up to the year ended 30 June 1998. Mr Bramwell's answer was in the negative. In re-examination he explained the reason for this in the following terms: "The reason was that in the profit and loss account in relation to the company the cost to acquire a customer was largely met or in great part met by Mobile Innovations and the cost of acquiring the customer was written off in the month in which the customer was acquired, which means that effectively the subscriber revenues generated by the existing subscriber base were funding the acquisition of new subscribers. Had the acquisition of new subscribers halted, the business would have been immediately profitable because the subscriber revenues, the subscriber profits driven by the subscriber base would have drawn straight to the bottom line and become profit." [Transcript 230] 157 Mr Bramwell also gave evidence that Vodafone had paid approximately $20 million for the subscriber base at the time of entry into the ASP. [Transcript 231] His evidence was that the sale had been at an undervalue in any event. [Transcript 231] Clearly enough, as Mr Bramwell made plain in re-examination, had the subscriber base worth $20 million been ascribed in the balance sheet for the financial year ending 1998, a substantially positive balance sheet position would have resulted. Reliability 158 Neither party dealt closely in final submissions with credibility issues. The matter of adjudicating upon all the evidence was clearly left to the Court. Probably this was because of the very extensive contemporaneous business records. Nevertheless some credit issues are dealt with in the findings. Where conversations are in issue, and on the rare occasion when it matters, the judgment includes the findings. Ultimately the case does not seem to turn on such issues, probably because of the limited role which reasonableness plays in the Court's findings. 159 In my opinion Mr Bramwell gave reliable evidence although he tended not only to respond to questions put to him in cross-examination, but to go beyond those answers in a non-responsive fashion, often to rebut what he saw as the point of the cross-examiners question. Notwithstanding this tendency it seemed to me that his evidence was generally consistent with contemporaneous documents. 160 Mr Bramwell gave evidence that whilst Executive Director of Cellphones Direct Limited, a United Kingdom company which operated as a service provider for Vodafone Group Plc in United Kingdom, he was approached in late 1993 by Vodafone Pty Ltd [now Vodafone Pacific] to set up a mobile direct marketing business in Australia. In March 1994 both Mr Shaw of Innovations Pty Ltd and Mr Bramwell of Cellphones established Mobile for this purpose, Mobile then being called Cellphones Direct Pty Ltd. 161 Mr Bramwell was involved, together with Mr Maher of Vodafone, in the negotiations for the new contractual relationship ultimately reached upon the execution of the ASP. Mr Bramwell's evidence included considerable detail of a number of these discussions and negotiations including reference to certain documents which were discussed at the time. His evidence as to conversations is conveniently chronicled in appendix XX. In the view which I take in terms of the pre-contract negotiations not being admissible in relation to the proper construction of the ASP, only limited reference will be made to those negotiations as and when appropriate. Evidence given by Mr Marchbank 162 In my view Mr Marchbank gave reliable evidence which was borne out by the contemporaneous documents. 163 At the commencement of Mr Marchbank's cross-examination he gave some general evidence in relation to the industry which it is convenient to repeat shortly. His evidence in this regard was as follows: · that generally speaking, during the period between 2000 and 2002 there had been substantially increasing competition between the three carriers, Optus, Telstra and Vodafone, and various service providers in respect of customers in the mobile market; [Transcript 276] · that this was particularly true between the middle and the end of 1999; · that the mobile area was considered during that period of time to be the telecommunications area with the most potential for growth; · that the mobile telecommunications area could be divided into a number of categories including 'low value consumer', 'high value consumer', 'small to medium enterprises' and 'large corporate'; [Transcript to 76] · that large corporate was never a target for 'off the page' advertising and that none of the direct marketers ever aimed their business promotions at that particular segment of the market; [Transcript 277] · that with respect to the non-business area, direct marketing generally aimed at the low value customer as distinct from the high value customer. It was correct possibly to say that those customers generally speaking looked for very good deals on handsets but the general value proposition involved additionally an access fee, a tariff [being a price per call], and contract lengths. Those integers were a combination of what the consumer, in whatever category, would find appealing; [Transcript 277] · that at the end of 1999 and into early 2000, each of Telstra, Optus and Vodafone, service providers, had a series of different plans; [Transcript 277] · that the price one paid by way of access fees and by way of call charges varied from plan to plan; · that it was not correct to say that the low value plans, particularly offered through direct marketing channels, were offering substantial discounts on handsets in 1999 and continuing into 2000; · that in relation to low access fees, the carriers' return over the period of time of the contract and on the various prices, primarily came from the number of calls which the holder of the plan or the user made. [Transcript 278] 164 Mr Marchbank towards the beginning of his cross-examination gave the following evidence: "Q. Would you agree with me that in the period in which you were the chief executive of Mobile, Mobile's business focused primarily on plans having a low access fee? A. That was the way we were directed from Vodafone throughout most of the period, correct… Q. ….And in relation to those targets, you then divided them up into various categories by reference to the plans that Vodafone had in existence? A. It's not quite that simple. I mean the target and the dividing up of the plans were a consultative process through most of that period. Q. Your plan, you would agree with me, throughout the period, was in respect of any targets, the preponderance of activity was appropriately directed to the lower access plans? A. That was determined by the size of targets. If the target was 20,000 for the quarter it was quite clear that that was, which would be a target that was set in conjunction with the plans Vodafone wanted to use at the time. It was pretty clear that 20,000 customers through our channel were going to come through low value plans. They weren't going to be 20,000 high value. If the target had been 5,000 it might have been more. It would have been easier to assume they would have been focussing on high value customers." [Transcript 279] Fixing and reduction of targets 165 Mr Marchbank was asked at the commencement of his cross-examination, a number of general questions in relation to the fixing of targets and the reduction of targets and included in this evidence he gave the following answer: "Q. Even at that time when there was a target of 9,000 you sought to allocate those subscribers in the main to plans below $20 as distinct from Vodafone's $33 plan? A. Correct. Q. And the reason for that was, of course, that you believed that the greatest potential for obtaining subscribers in the direct marketing channel was at what I might call the lower end of the access fee range? A. No, I would disagree with that because the reason why - you have to look at where we were coming from. We had been selling plans lower than the ones recommended in September and we were going to go from $9 to $33 in two successive quarters. We had to get there gradually because the marketing is more than changing a sign in a shop and starting to sell something different. We recommended to Vodafone gradually increasing the size of access fees and trying to increase profitability over a period of time, rather than literally changing a sign and trying to sell something completely different, which in our experience had not worked before and was going to cause Vodafone to waste a lot of their money." [Transcript 280-281] Evidence given by Mr Shaw 166 Mr Shaw gave evidence in relation to the Marketing Agreement that there was a guaranteed minimum subscriber fee payable pursuant to that agreement in the sum of $50,000 per quarter (which went up to $55,000 a quarter when GST came in) [Transcript 734]. Hence under the Marketing Agreement, Innovations Direct would receive approximately $220,000 each year whilst Innovations Holdings would receive another $204,000 annually. 167 He received director's fees from those funds in an amount of $30,000 annually. He gave the following evidence: "Q. For those fees did Innovations Holdings and Innovations Direct, either through you or other members of those company's staff, provide advice to Mobile as to how to market Vodafone products? A. Yes. Q. Did they provide advice as to how to obtain access to affinity programs? A. How do you define affinity programs? Q. Did they provide advice as to how to go about obtaining relationships with corporations which would have lists of customers to whom mail outs or other information advertising Vodafone's products could be directed? A. That would have been one of the areas they would have provided advice on. Q. Would they have provided advice as to the best segment of the potential mobile phone market to attack? A. No, they wouldn't have given advice in that area, that would be very mobile phone specific as opposed to direct marketing. Q. However, no doubt Innovations would have some view as to what particular segment of the market would be susceptible to direct marketing advertising; is that correct? A. Absolutely." [Transcript 734] Q. Would you agree with me that whatever be the case, in 1998 the majority of subscribers picked up by Mobile in 1999 and in 2000 were at what was generally known as the low value end of the market? A. Yes they were. Q. And it would be fair to say, would it not, that Mobile's advertising campaigns were directed to attracting those type of customers at least in 1999 and 2000? A. The advertising was geared up to attract the consumer end of the market. Most of the people who joined up were probably first time users and initially they started on a fairly low dollar commitment. Q. And the way you attracted them, and if I'm oversimplifying it please say so, was effectively to offer them plans which, as you say, gave them little or relatively low commitment, together with incentives such as free handsets or other accessories for which they, at least on the face of it, didn't have to pay? A. Correct. [Transcript 738] "Q. Would you agree with me that to move from that market - I withdraw that - would you agree with me that in the period towards the end of 2000 the opportunity for growth in that particular market wasn't as great as it had been, for example, around May 1999 when the prospectus was issued? A. No, I wouldn't agree to that. Q. You would agree with me that there had been, in 1999 and 2000, a considerable intensifying of competition for that type of subscriber? A. There had always been a lot of competition, that type of subscriber, as far as I was concerned. Q. I want to suggest to you that that competition intensified during 1999 and 2000? A. No, I wouldn't say that." [Transcript 739] "Q. You will see the presentation provided that the telco market bubble burst in the financial year 2001 and then you refer to what happened to the share pricing telecommunications stock and then there was - then you will see there is a statement market moved from volume focus to value of customers. Do you see that? A. I see that. Q. That was what was occurring, was it not, throughout the telecommunications market, as you perceived it, in Australia in at least the latter part of 2000 and leading through to the financial year ending 30 June 2001? A. In my view it really only started later in 2001. As I remember it, our largest quarter of connections was the last quarter of 2000 in the history of the company and going back to your original question, competitors come and go and there have been periods in the history of the company where we have had enormous competition. Q. But would you agree with me that at least in the early period of 2001 the market moved from a volume focus to value of customer? A. Certainly Vodafone's focus did. Whether other companies in the telecommunications industry did to the same extent, I don't know." [Transcript 740] Targets set from October 1998 up to March 2000 quarter 168 During opening address the plaintiff's senior counsel made plain that during this period of time the quarterly targets were generally in the range of approximately 20,000. The precise targets are now before the Court. Late 1997 169 Competing versions of the content of several meetings between Mr Bramwell and Mr Maher which took place in late 1997 concerning the proposal to move to a new service provider model are to be found in appendix XX. January 1998 - October 1998 170 Competing versions of the content of various meetings between Mr Bramwell and Mr Maher which took place in early 1998 again generally dealing with the lead up to the finally negotiated ASP are also to be found in appendix XX. 171 The same appendix: · includes the evidence given by Mr Stonell concerning meetings between March and October 1998 which he attended together with Mr Bramwell and which Vodafone representatives Ms Blake and Ms McDonald also attended; · the evidence given by other witnesses of continued conversations in relation to a number of matters; · treats with conversations in about July and August 1998 between representatives of both parties concerning matters such as exclusivity for direct marketing proposals; · covers various meetings and conversations leading up to a 29 September 1998 meeting shortly before the execution of the ASP. Proposal to float 172 By March 1998 the proposal to float Mobile had already emerged during internal discussions. [Transcript 131] 173 Mr Stonell prepared discounted cash flow analyses relating to the value of the subscriber base. Questions such as the appropriate prediction for an average life for a subscriber required to be treated with as an integer. Modelling 174 The conversations and meetings during this period of time between Mr Bramwell and Mr Maher threw up close discussion on their disparate approaches to the value of Mobile's subscriber base. Questions of whether or not customers should be valued on a net present value basis arose. Not surprisingly Mobile produced a valuation which was far higher than that which Vodafone was prepared to accept as fair and reasonable. At the same time modelling took place in relation to a number of parameters including fees for services. Costs to manage were discussed. Acquisition costs were discussed. Security factor 175 These discussions, as Mr Bramwell conceded, included a particular consideration of value to Mobile, namely the security of becoming an agent rather than being exposed to the vagaries of the churn factor and the like in relation to a dynamic business in respect of which increased competition was emerging at a rapid rate. 176 Mr Maher suggested to Mr Bramwell that Vodafone was dissatisfied with the commercial arrangements whereby Vodafone sold product to service providers which on-sold to the market partly in competition with Vodafone itself. [Transcript 139] Value of future contract to make up perceived value 177 Mr Bramwell gave evidence that during the pre-contract conversations, Mr Maher had a conversation with him where Mr Maher made it clear that whatever Mobile's view of the value of the subscriber base, Vodafone would only be prepared to buy it at a certain value and that Mobile "should look to the value of the future contract to make up any perceived shortfall" [Transcript 141]. It was put to Mr Bramwell that no such conversation took place but he continued to assert that the conversation did occur. Mr Bramwell did however accept that he sought to negotiate an ASP agreement which on its terms would provide Mobile with security to compensate it for what Mobile regarded as a shortfall in subscriber bases. [Transcript 141] 178 Mr Bramwell under cross examination accepted that: · he ultimately indicated to Mr Maher, that Mobile valued its customers at over $400 per customer; · he believed the value was closer to $200 but they wanted to change the service provider model to a sustainable one and therefore he was prepared to negotiate; · it was in that context, that the models or Mr Stonell's model, was produced; · at about that time he had some further conversation with Mr Maher, when Mr Bramwell indicated to him that at the price that Mr Maher was suggesting, around the $260 mark, Mobile were being paid less than Mr Bramwell believed the customer base was worth; and · Mr Bramwell indicated to Mr Maher that the new model had better return a higher profit than the current one and that Mobile were profitable at the time and must stay so or improve. [Transcript 141 - 142] 179 Mr Bramwell also gave the following evidence: "Q. You came away from the conversation you had with Mr Maher believing, did you not, that his view was that telcos were paying too much to acquire customers? A. Whether that - well, you must understand that this was against the background of the negotiating room… A. Mr Maher may well have expressed an opinion which he may not truly have held but it may have been perhaps a negotiation stance, so I wouldn't agree with that. Q. Whether or not it was a negotiation stance or otherwise, that was the effect of what he was telling you, wasn't it? A. But now, whether he was - I say he said that to the effect of being involved in negotiation. Whether he truly believed that or not I don't know. Q. I am not asking whether he truly believed it or not. What I am asking you or what I am suggesting to you is that is what he said to you, or words to that effect. Do you agree with that? A. Whether he said those words quite so directly, but I am sure he suggested that, yes. Q. And he also suggested to you, did he not, that his view was that profit in the area would increasingly come from the efficient management of customers? A. That was one of the points he made, yes. Q. And consequent on him making that point, you had members of your staff do further financial analyses. Do you agree with that? A. Based on subscriber management charges, yes. Q. And you told Mr Maher that to get a similar profit you would need a monthly management fee of about $6 or $7 per customer and for acquiring customers $40 per customer to cover your fixed overheads but Vodafone would have to meet your variable costs? A. I think the exact discussion was I suggested that on top of the costs of money in a subscriber, we would look to a margin of $3 per subscriber per month and we would look to a margin on the acquisition of subscribers of $40 per subscriber and we would also look for the model to be very much a cost plus model, so in other words all our direct and indirect costs involved, basically the costs of running the sales and marketing for our team in full would be met by Vodafone as part of the acquisition side of the business." [Transcript 143 - 144] Guarantee of connection discussions 180 Mr Bramwell under cross-examination gave evidence to the following effect: "Q. And one of the issues that you discussed, did you not, with Ms Blake is whether the agreement with Mobile could contain a guaranteed number of subscribers? A. I think that was more a conversation with Mr Maher, not Ms Blake. Q. Do you recall having a conversation concerning that matter when Mr Maher and Ms Blake were both present? A. Ms Blake may well have been present but I would - my recollection would be the conversation was primarily with Mr Maher though. Q. Would you agree with me that during the course of the conversations you sought a guarantee of connection volumes? A. I think we sought a guarantee of connection volumes in terms of - my biggest concern with Vodafone has been their annual habit of reducing volumes towards the end of each financial year. Although the sales overhead, or the sales costs were covered by the ASP agreement, our biggest concern was clearly we had a central margin which didn't fall into either the management fee or the acquisition costs which needed to be covered. So for the odd occasion when we believed Vodafone might try to reduce connection volumes we did ask for some cover, i.e. for a minimum amount of acquisition margin to be paid to cover our central or corporate overhead. Q. Can I take you to the stages. Do you remember having a meeting between yourself, Mr Maher and Ms Blake, where you indicated that you needed certainty around connection volumes? A. Certainly around connection volumes, that applies in a number of different areas, yes. Q. And you said in that context, I want to suggest, that you can't run your business effectively if you keep reducing volumes in the last quarter of the financial year? A. I think I said it was hard to cover a central overhead when that was the case, yes. Q. But Mr Maher said, did he not, that you would have to understand that from time to time there is always likely to be a need to do this given the financial constraints of the business? A. I remember the conversation being based around Vodafone's normal year-end hiatus. Q. And you said in this context that you needed a certainty of earning a minimum revenue to be able to know that your fixed overheads would be covered? A. Actually, I said we needed certain revenues to cover our corporate overhead or central overhead. As the sales overhead or the fixed overhead in terms of the sales marketing operation, it was covered under the ASP agreement. Q. You indicated you needed to ensure that a minimum margin was paid even if targets were set below the level necessary for you to meet your fixed overheads? A. It wasn't fixed overheads. It was, if you like, a corporate overhead or - there were a number of different types of fixed overheads within the business. I was referring to, if you like, the corporate or central overhead, as the fixed costs relating to sales and marketing were covered under the ASP agreement. Q. Mr Maher indicated to you that he could look at giving you a guaranteed revenue level to cover those costs but he couldn't guarantee connection volumes? A. I think in the narrow area of the year end issue, he said he could certainly cover or give us a guarantee of the level of revenue to cover, if you like, our fixed overheads in those periods, yes. Q. There was also a discussion, was there not, about the margin to be paid in times of high connection volume? A. Yes, that is right. Q. And Mr Maher indicated to you that it was his view that if Vodafone was to accept a risk on low volumes, by claiming a guaranteed minimum acquisition fee, [it] should get some benefit from the cost savings Mobile enjoyed in times of high volumes? A. I am not sure the two were discussed in tandem or were linked in that way. Q. They were certainly both discussed, whether they were - A. But I would dispute that they were linked in that way. Q. But you agree with me at the very least that they were discussed? A. They were discussed, yes. Q. And I want to suggest to you they were discussed as I just put to you? A. I would disagree. Q. Yes, there was a discussion, was there not, between you and Mr Maher concerning what Mobile should be paid in times of higher volumes? A. Yes, that is right. Q. And one of the alternatives Mr Maher raised was setting a maximum number of customers that Mobile could acquire in any given month? A. I don't think - that is not my recollection of how that came about. My recollection of how it came about is the suggestion that we would be earning a significant amount of money if we were paid a full connection - full acquisition margin on certain numbers of subscribers and it was only fair if we drove for higher volumes that we should enjoy lower connection bonuses or base acquisitions - sorry, acquisition margin. Q. There was, was there not, some consideration given during the course of the negotiation to setting - to whether or not a maximum number of customers that MI could acquire in any given month be set? A. I don't recall any maximum target being set or any discussion regarding a maximum target. Q. And ultimately what was agreed was what emerged in the ASP, namely, a different level, namely a different charge to customers over a particular amount? A. I agree with that, although I don't agree there was linkage with your previous point. I don't think there was ever a maximum target discussed ." [Transcript 146 - 148] [emphasis added] October 1998 and following October 1998 - December 1999 181 During this early period in the life of the ASP a number of problems arose strongly suggestive of a deteriorating relationship between the parties. December Marketing Plan 182 Mr Bramwell recalled that in about December 1998 some discussions had taken place concerning the December marketing plan. Mr Bramwell accepted that Mr Maher had said that it was important that acquisition costs were kept as low as possible and that Mr Bramwell had accepted and indicated that he was happy to work with Mr Maher on this matter. [Transcript 153] Vodafone objectives 183 A letter of 18 January 1999 from Vodafone to Mobile [2/ 319E] includes the proposition that as Mobile were aware, Vodafone required to achieve the following objectives: · reduce the proportion of $10 plans to an absolute minimum; · reduce the cost of acquiring (and ultimately of managing) the $10 plan connections; and · align the connection volume and mix as closely as possible with Vodafone's forecast. 184 Mr Bramwell recalled these objectives of Vodafone being conveyed to him. [Transcript 167] 185 Ms Statham gave the following evidence under cross-examination: "Q. Would you agree with me that you became aware, at least from the early part of 1999, that Vodafone were concerned at the high proportion of the low value ten dollar plan sales that Mobile was budgeting for? A. At that particular time, yes. Q. Sorry, go on? A. Their plans changed all the time. So, we sort of, we would take their plans and offer advice on how to take their plans best to the market to achieve the sort of volumes they wanted. They were very driven by volume at this point with the ten dollar plan." [Transcript 528] 3 February 1999 – Overhead costs higher than expected 186 A letter of 3 February 1999 from Mobile to Vodafone [2/ 323E] detailed several reasons why overhead costs had been higher than expected for the month of October and included a statement by Mr Stonell as follows: "In writing, I would like to say that I was a little surprised by your reaction to the Actual Cost to Acquire figures. At the time of finalising the ASP Agreement I felt that we were all aware of the pioneering nature of the agreement, and that it would take a little time to refine the procedures." March 1999 – Marketing of plans other $10.00 plan 187 By March of 1999 Vodafone were becoming concerned with the "economics" of the $10 plan. [323X] In response to this concern Mr Bramwell suggested that one solution might be to introduce quarterly billing (TB331E-F). 188 Mr Bramwell made plain that certainly by about March 1999 Mobile were marketing plans other than the $10 plan. [Transcript 174]. 15 March 1999 – Float concerns 189 On 15 March 1999 Mobile wrote to Vodafone in relation to Mobile's Initial Public Offering and raising a number of matters for consent. A number of amendments to the ASP were sought in view of the impending float. In this regard Mr Bramwell expressed the opinion that in a competitive marketplace, if Vodafone was seeking the growth that he believed they were seeking, a $10 plan was important to be part of the marketing fix. Generally he accepted that in relation to the acquisition of subscribers, the profitability to Vodafone depended upon whether the revenues they derived from a subscriber offset the costs of acquiring a subscriber and of managing that subscriber or having it managed. [Transcript 169 - 170] 17 March 1999 190 On 17 March Mr Webb send a facsimile to Mr Stonell, refusing to pay Mobile a fee for retention activities and handset upgrades. [2/326] 18 March 1999 191 Mr Bramwell wrote a letter on 18 March 1999 to Vodafone [2/ 331E]. In this letter he said inter alia: "As we have always made clear, a price differential is crucially important for direct marketing to work cost effectively. We have noticed considerably increased marketing activity in our area recently, with a number of aggressively priced offerings which have certainly eroded the advantage we previously enjoyed." 192 Mr Bramwell gave the following evidence: "Q. Was this the position, that Optus and to a lesser extent Telstra and resellers had been entering into the direct marketing channel to an extent greater than before? A. I think that is broadly true at the time, yes. Q. And were offering fairly generous packages to potential subscribers? A. Yes, that's correct. Q. And you were concerned in that context that the $10 plan be offered with free connection for the next quarter? A. Yes, that's correct. Q. But what was proposed in that context was this, was it not, that the connection cost be effectively borne by Vodafone? A. If I could just explain for a moment some of the dynamics of how free connection would work-- Q. If it's in answer to my question, please do. A. I was proposing free connection, yes. Q. And the cost of free connection would be borne by Vodafone. If you need to explain it, do. A. I'm sorry, I can answer that, but actually the costs of free connection ultimately would not have been borne by Vodafone. Q. Why do you say that? A. Direct marketing is price sensitive, as we've discussed, or value sensitive perhaps. One of the major costs of acquiring subscribers through direct marketing channels is advertising and clearly the number of phones you sell per advertisement means - to give you an example, if you take an ad in the Sydney Morning Herald and it costs $4,000 and you sell 100 phones from that advertisement, quite clearly your cost per sale is $40 per sale. It may well be that by offering free connection you sell not 40 phones from that advertisement but 200, in which case the cost of connection is more than covered by the fact that the response to the advertisement is much higher, so what I'm trying to say is that although Vodafone may fund the cost of a connection they may well find the overall cost of acquisition for that subscriber may fall. Q. That is, I would suggest to you, logical and entirely correct somewhat subject to one proviso and that proviso is that the subscribers ultimately return a profit to Vodafone? A. I'd suggest that that is a different part of the discussion. If we're talking about costs of free connection as opposed to cost to acquire, I suggest that the long-term profitability is a supplementary issue. Q. …..The proposition you're putting is this, is it not, that in 1998 it was desirable for Vodafone to acquire as many subscribers as possible? A. Yes. Q. And you are suggesting that the more subscribers that are acquired the more their advertising costs would be amortised? A. Correct. Q. Having said that, you would agree with me that what you were proposing involved paying in terms of each subscriber an amount for a connection fee. Correct? A. To be honest, as I explained a few moments ago, it's the value proposition which we look at and the overall cost to acquire. Whether Vodafone were paying for a battery charger for a car or for a connection is largely irrelevant when it's viewed in the context of the cost to acquire for that subscriber, but in answer to your narrow question, yes, Vodafone would be funding the connection cost. Q. What I want to put to you is this proposition….The more money you spend on acquiring unprofitable customers, the more likely it is that the business which you are operating is going to fail? A. Whose business would that be? Q. Vodafone's business, in that context. A. I'm not party actually to Vodafone's exact economics. Q. Mr Bramwell, it's a simple proposition: If for every customer you lose $5, you're worse off if you've got a million customers than if you've got 500,000 customers. Would you agree with that? A. I'm just trying to work through. If you are indeed losing that money per subscriber, yes, that would be true. Q. You see, what I want to suggest to you is that on the $10 plan issue, and on other issues which arose during the period you remained with Mobile, Mobile simply did not recognise the proposition that there was no point to Vodafone acquiring customers in respect of which it would lose money. Do you agree with that? A. I would point out that Vodafone set the tariff climbs as they were able to do under the ASP agreement. The tariff decisions were Vodafone's." [Transcript -170-172] 26 March 1999 193 Ms Blake gave evidence in relation to a meeting of 26 March 1999 attended by Mr Webb, Mr Bramwell and Mr Stonell. It is convenient to note the extent to which Mr Bramwell under cross-examination agreed with this evidence. Ms Blake's evidence [affidavit para 87] was that the following was said: "On 26 March 1999, Mr Webb and I had a meeting with Mr Bramwell and Mr Stonell at Vodafone's offices in which we discussed the $10 plan: Mr Webb: " We need to talk about the $10 plan. It is not economical for us. " [Mr Bramwell accepted that words to this effect were generally said] Mr Bramwell: " We have reduced our advertising budgets, but the ads aren't working as well. " [Mr Bramwell accepted that words to this effect were generally said] Mr Webb: "We need some details behind that to understand the issues better." Mr Bramwell: "We can review the responses to each advert for each tariff offering." Ms Blake: "We need to make the $10 plan pay somehow. [Mr Bramwell accepted that words to this effect were generally said] Do Telstra charge for itemised billing?" Mr Webb: "CTM reductions would help. It just doesn't work as it is." Mr Bramwell: "We are prepared to look at reducing CTM for billing these customers quarterly." [Mr Bramwell accepted that words to this effect were generally said] Ms Blake: "How much would this save?" Mr Bramwell: "We could reduce straight away by $1.00, then a further $0.50 later, once the system changes were in place." [Mr Bramwell accepted that words to this effect were generally said] Ms Blake: "How long before you could drop by $1.50?" Mr Webb: "And could you drop any further?" Mr Bramwell: "We could probably move to $5.50 in July, and probably to $5.00 a year later. After that there is a review in the contract in September, so any further savings will be covered by this." [Mr Bramwell accepted that there was a plan to move to a lower cost to manage a subscriber over a period of time. He believed that he had said that if Mobile were being asked to reduce some of its margin on managing subscribers, it would be reasonable that Mobile should expect a higher volume of subscribers to make up the margin foregone] Ms Blake: "We also need to move existing $10 plan customers to quarterly billing as soon as possible." Mr Bramwell: "We need more certainty on volumes." Mr Webb: "Can we reduce the $40 BAM we pay you if we agree to guarantee increased volumes?"[Mr Bramwell accepted that Mr Webb asked to reduce the base acquisition margin on lower call plans] Mr Bramwell: "We really can't move on that." [Mr Bramwell explained that while Mobile could help on one count it could not damage their business by reducing margins on both counts] Mr Webb: "Well we can't give higher volumes unless we can reduce acquisition costs. And we need to move away from the $10 plan and start connecting customers to higher plans." [Mr Bramwell accepted that words to this effect were generally said] Mr Bramwell: "We need to test any new offers we go out with before we can move away from the $10 plan." 194 Mr Bramwell gave evidence that he believed that the reasons why Vodafone needed to have a movement away from the $10 plans and up to the higher plans was that Vodafone regarded those plans as more profitable to it. He believed the discussion had included reference to growth and Vodafone's position in the marketplace and that the conversation on margins was tempered with the view that growth was also important to Vodafone. [Transcript 173 - 174] 195 Ms Statham under cross-examination gave evidence that she recalled Ms Blake indicating at the meeting that it was necessary to look towards higher value plans. Further evidence was given under cross-examination: "Q. Notwithstanding that Mobile took the view, did it not, that the only way it could get subscribers in any significant volume was, in 1999, was to focus on the lower end of the scale, in that year the ten dollar plan? A. No, we were able to achieve the sort of growth that Vodafone wanted to. We also strongly suggested that we kept advertising the ten dollar plan so that we could actually up sell some of the customers as well. In order to achieve both the growth and volume they wanted, and a low CTA, combining them was the only way to do it. [Transcript 528 – 529] 29 and 31 March 1999 196 An exchange of letters between the parties of these dates dealt with various matters which they were able to agree upon, Vodafone continuing to express its opinion that the economics of the $10 plan did not make sense and asserting that the proposals which had been put forward by Mobile did not go far enough in rectifying net present values that were being experienced with the mobile connections to the plan. 197 Mr Webb in the 31 March 99 Vodafone letter [2/ 354] said that further to the discussion of the previous day, he had agreed to document Vodafone's preferred position for April and moving forward on the cost to acquire and cost to manage which included: · agree to the original estimated cost to acquire figures which [Mobile] had presented including free connection to $10 call plan with a rate of 6000 per month for April and May, [subject to a number of identified matters]; and · increase the guaranteed minimum in clause 18.3 of the contract from 4000 per month to 6000 per month for April and May. Moving forward it is expected that this increase will be continued subject to being able to agree a way forward on the economics of …average connection makes." 1 April 1999 198 Ms Blake sent Mr Bramwell on 1 April 1999, a summary of the issues Vodafone wanted to address as part of a review of the ASP Agreement, including, the issue of including in the ASP Agreement a clause regarding handling of and payment for handset upgrades. [2/356-357; Mr Bramwell 20/5/02 para 38] 2 April 1999 199 Mr Bramwell via an e-mail of 2 April 1999 confirmed an agreement which included: · that Mobile will promote the current $10 call plan with free connection for the months of April and May. As soon as practicably possible, Mobile will test the new call plans due to be launched in early May; · that Mobile would commit to advertising to enable it to meet Vodafone's target of 6000 connections per month for the quarter. It is intended that for the month of June an alternative call plan will be substituted for the $10 plan. Which plan this will be should emerge from the testing to be carried out during April and May [comments of Ms Blake were "Agreed, subject to this being in-line with your original estimated cost to acquire for 6000 connections per month]." Early April 1999 200 Conflicting evidence asbetween Mr Stonell and Ms Blake was given about what happened at a meeting where there was a discussion about upgrade costs. [cf Exhibit XX at pages 24, 25] 7 April 1999 201 By letter of 7 April 1999 from Vodafone to Mobile, an agreement regarding handling fees for upgrade costs was confirmed [2/ 358]. As Mr Bramwell accepted in cross-examination, the arrangement in effect was that the upgrade fee would be passed on to the customer as a handling fee, so that the debate as to cost, at least in that regard, was solved by passing a charge on to the customer. [Transcript 177] 202 At about the same time Mobile received a draft form of offer from Vodafone concerning the minimum quarterly level of connections [2/ 359]. The draft provided for the incentive to run for the period from 1 July 1999 until the earlier of either 30 June 2004 or three months after Vodafone would give notice that it wished to discontinue the varied terms, "the arrangements becoming uneconomic for Vodafone to continue", unless both parties agreed to an extension of the incentive. Thereafter the terms of the ASP would apply. 203 Mr Marchbank under cross-examination gave evidence that Mobile, up to May of 1999, had been operating primarily in relation to low entry-level customers and had operated in effect without very much competition at all in that regard. Prospectus issued 204 On 19 May 1999 a prospectus was issued [3/ 1]. On offer for sale were 32.3 million shares at an offer price of $1 per share. The shares offered represented approximately 29.4 percent of the current issued (undiluted) capital of Mobile and were to rank equally in all respects with the other share capital of the company. 205 Although Mr Marchbank had only joined Mobile sometime later, he accepted that it was his understanding that up to the time of the prospectus, Mobile had had very little competition in the direct marketing area. [Transcript 282] 206 Relevantly the Prospectus included: · under the "Investment Summary" [3/ 383] inter alia: - Mobile Innovations earns revenue in three principal ways, being from: - a margin paid by Vodafone on new subscribers secured by the Company pursuant to the ASP Agreement - a monthly fee paid by Vodafone to manage the subscriber base pursuant to the ASP Agreement - the sale of related products and services · under the "Telecommunications and Mobile Telecommunications Overview" the following: " Australian Telecommunications Market In-line with the global industry trend, telecommunications has been one of the fastest-growing industries in Australia with the rate of growth in the telecommunications sector exceeding that of the Australian economy. In the five years to 1998, Australia's Gross Domestic Product grew at an average annual real growth rate of 4.3 percent while the telecommunications sector grew at an average annual real growth rate of 9.4 percent. The Australian telecommunications market grew from total revenue of $18 million in 1994 to almost $25 million in 1997. This growth in industry turnover has occurred despite price reductions, which have mainly resulted from increased competition"[3/ 391] [I interpolate to note that Mr Marchbank agreed that as prices had dropped, this caused companies either to increase volume or to cut costs or both, in order to maintain profitability. Mr Marchbank's proposition was however that if prices dropped to a level where acquisition of subscribers became unprofitable, this might be remedied either by cutting costs or by changing the mix of customers who were being acquired.] [Transcript 285] · also under section 3 reference was made to an expectation that further growth in the mobile sector be driven by: - attractive consumer based pricing plans; - greater acceptance of Mobile telephony; - prepaid contracts for Mobile telephony; - emerging data service capability from handsets and networks. [3/ 395] · under Section 4 dealing with Mobile Innovations [2/ 402-403], the following appears: "The Agent Service Provider Agreement The Company's relationship with Vodafone is governed by a 10 year ASP Agreement which commenced on 2 October 1998. The core purpose of the ASP Agreement is to harness Mobile Innovations' direct marketing skills in order to achieve Vodafone's marketing objectives as cost effectively as possible. As such, interaction with Vodafone is continuous and at a number of levels. Formal quarterly market review and planning meetings are held to agree strategies, subscriber growth targets and quarterly cost budgets. The targets agreed may affect the relationship between volume and margins in order to meet the challenges of the market conditions at the time. Within each quarter, monthly meetings review progress to date and allow variations to plans. Less formal communication between the Company and Vodafone takes place on a daily basis. The Company is remunerated in two ways – an acquisition fee for each subscriber acquired for Vodafone and a monthly fee for managing the customer base. At present, these two fee elements are the major determinants of Mobile Innovations' profitability. Acquisition Fee A quarterly marketing meeting between Vodafone and the Company sets the marketing and sales budget. The Company charges customer acquisition costs to Vodafone, plus a fixed fee for each subscriber acquired during the period. The fixed fee is adjustable annually for inflation, with the first adjustment taking place in October 2000. The ASP Agreement provides the Company with an important safety net through a guaranteed minimum number of new customers per quarter or revenue to an equivalent level. In addition, Vodafone has contracted to exclusively channel a number of its non-electronic direct marketing activities through the Company. However, it is at Vodafone's discretion whether it utilises direct marketing as a route to market and the proportion of its overall marketing budget it elects to channel through the Company. The Directors believe that despite this discretion, Mobile Innovations is, and will continue to be, one of the most cost-effective marketing channels for Vodafone. Management Fees Mobile Innovations has the exclusive right to manage the subscribers acquired by it, both in the past and in the future, in return for a fixed monthly management fee per subscriber. As part of the ASP Agreement negotiations, the fee was benchmarked by Vodafone against other Vodafone Group companies to ensure that it was cost effective and service standards were agreed to ensure the ongoing quality of customer care. Despite the competitive nature of the fee structure, the Company is able to achieve an attractive margin over its costs, due principally to the efficiency of specialisation. Centralised call centre-based customer care operations and a sophisticated credit card billing platform contribute to an efficient cost structure that the Directors believe is well below the industry standard. Future volume efficiencies and system enhancements are expected to further reduce management costs per subscriber and increase margins. In this instance, the Agreement incorporates a formula for sharing these benefits between the Company and Vodafone, providing both with an incentive for achieving greater volumes and efficiencies. Whilst cost management will continue to be important, a significant aspect of the ASP model is the clear relationship between the Company's profitability and subscriber numbers. The Directors believe that continuing cost effective customer management, successful marketing and subscriber growth will generate higher revenue and improved profitability for the Company. The ASP Agreement provides that the parties may at least six months prior to the expiry of the ASP Agreement enter into bona fide negotiations to extend the term of the ASP Agreement for a further period to be agreed between the parties. A summary of the ASP Agreement is set out in Section 8. Marketing Mobile Innovations targets the high volume comparatively low spend customer market using a wide range of direct marketing techniques. Direct marketing is driven by up-to-date knowledge acquired through constant market testing and detailed analysis. The major elements in new marketing campaigns (such as handset pricing, call plans and free offers) are tested in competing advertisements prior to national "rollout" and creative changes to advertising material are constantly introduced and evaluated. The source of each order is recorded and analysed daily, ensuring that emerging trends are identified and that the results of tests are implemented promptly into mainstream campaigns." [ 402 – 403] [emphasis added] · within Section 6 under the heading "Risk Factors" the following appears as part of the several matters raised: "Reliance on the ASP Agreement The current business of Mobile Innovations relies on the continuance of the ASP Agreement and the business strategy of Vodafone. The ASP Agreement contains certain termination clauses which can be treated by persistent and/or unresolved breaches of the ASP Agreement by Mobile Innovations. [Reference was then made to the term and to their being no obligation on Vodafone to extend the term]." [2/ 415] "Vodafone Business Strategies Mobile Innovations performance is tied to the business strategy of Vodafone. While Vodafone is required to pay Mobile Innovations certain contractual amounts for the term of the ASP Agreement, Vodafone's pricing and marketing strategies may not maximize Mobile Innovations' operating performance." [2/ 416] 207 Mr Bramwell when shown the references in the prospectus to Vodafone's discretion gave the following evidence: "Q. Your understanding at the time was, in effect, that Vodafone did have a discretion as to how and to what extent it would use the direct marketing channel? A. Yes, I think that reflects the case-- Q. And your position was at the time that Vodafone would continue to use the direct marketing channel because it was commercially a desirable thing for it to do? A. I think I formed the opinion for two reasons fundamentally. Q. What's the second reason? A. The second reason is that there were some very strong exclusivity clauses in the agreement which prevented Vodafone from direct marketing through other channels. Direct marketing always has been and still is an important part of the product mix for most networks and we took the opinion that our growth would largely be supported by the exclusivity clauses in the contract which meant that any direct marketing to be done by the Vodafone network would be done through Mobile Innovations. Q. So is this a fair summary of your process of reasoning: Firstly, that direct marketing was both a necessary and desirable feature of the mobile phone business? A. Yes. Q. Secondly, that Vodafone would continue to allocate part of its funds to direct marketing? A. That was our belief, yes. Q. And if it did that it could only do it through Mobile? A. Correct. Q. Did you agree, if you could go to page 403, with the proposition put under the heading "Marketing" that Mobile targets the high volume, comparatively low spend customer market, consumer market, using a wide range of direct marketing techniques? A. Yes. Q. And when you say "high volume consumer market" are you referring there to the large number of consumers who would potentially be customers? A. Yes. Q. And in relation to low spend, recognising that the people to whom you were focusing your activities didn't spend much on their mobile phones over a given period relative to people who generally purchased those phones through other channels? A. I think the term "comparatively low spend" is correct, yes." [Transcript 179-180] 208 One of the critical assumptions lying behind the prospectus forecasts for the years ended 30 June 1999 and 30 June 2000 was that the subscriber base would rise from 66,000 as at 1 July 1998 to 107,000 by 30 June 1999 and to 160,000 by 30 June 2000. 25 May 1999 – Agreement to vary the ASP Agreement 209 On 25 May 1999 Vodafone wrote to Mobile making a formal offer to vary the terms of the ASP Agreement for the period 1 July 1999 until the earlier of (1) 30 June 2000 or (2) three months after Vodafone gave notice that it wished to discontinue the varied terms should the arrangements become uneconomical for Vodafone to continue. The offer, which was formally accepted (2/ 374, 375) had been as follows: " Minimum Level of Base Acquisition Margin Increase the quarterly minimum level of connections referred to in clause 18.3 of the ASP Agreement from 12,000 to 24,000 Calculation of Base Acquisition Margin The CTA Margin will be calculated in accordance with the definition of Base Acquisition Margin in clause 1.1, except that the margin payable in respect of connections on a Low Tariff Plan in excess of 4000 connections in that month, will be $20 Payment of this CTA Margin remains subject to clause 18.2 and 18.3 For this purpose, Low Tariff Plan includes plans for access to the Mobile Services which has an access fee of less than $20, or an access fee of $20 including free calls." 210 As Mr Bramwell accepted under cross-examination, at this stage it was fair to say that the issues in dispute in this period had been resolved as follows: · as to handsets-the upgrade fee had been passed on to the customer; · in relation to the $10 call plan, the cost of acquisition based on free connection had been accepted, but it was acknowledged that, as with all call plans, the $10 call plan would be reviewed; and · in relation to minimum levels, there had been an agreement that there would be an increase from 12,000 to 24,000 subject to Vodafone having a right to review that and to determine it on three months notice if it became uneconomic. 24 June 1999 - Ms Blake email [3/ 457P] 211 In an email of 24 June Ms Blake wrote to Mr Stonell and Ms Statham stating that 98% on $10 was not an acceptable connection mix. Under cross-examination, Ms Statham gave evidence that she recalled this communication. [Transcript 529] 25 June 1999 212 Mobile listed on the ASX on 25 June 1999. 1 July 1999 213 A response to the 24 June 1999 email was sent. 30 July 1999 – Incentive withdrawn 214 Only five weeks after the 25 May 1999 formal agreement, Vodafone on 30 July 1999 wrote to Mobile referring to the agreement and giving notice that the incentive detailed in the 25 May letter was to be withdrawn and that connection targets commencing from 1 November would revert to 4000 per month. [3/ 460] 4 August 1999 – Deteriorating relationship 215 A letter from Mobile [Mr Bramwell] to Vodafone of 4 August 1999 [3/ 461] made the point of the deteriorating relationship in serious terms. This letter complained about what were put as a number of significant changes in direction by Vodafone during the relevant year. The letter complained in respect of these changes: "leaving us, yet again, with no real idea as to the intended volumes in the last quarter of this year. Such changes seriously affect our ability to plan, which inevitably drives subscriber acquisition costs upwards". 216 The letter complained of other issues including an allegation that the exclusivity arrangements had been breached by Vodafone Pty Ltd operating a mobile direct marketing operation in contravention of the ASP, both in their own right and through dealers. The letter voiced a concern that the agreement, which was said from its inception to have been planned as a partnership, had become one marred by lack of communication and potential conflict. 217 Mr Bramwell gave the following evidence under cross-examination in relation to this letter and period of time: "Q. You were unable, were you not, to say one way or the other whether the agreement was proving uneconomic to Vodafone? A. I would suggest by virtue of the time between the initial offer and the subsequent letter written by Mr Webb no party could have ascertained the profitability of the call plans and the economics generally. Q. Mr Bramwell, Vodafone had been consistently protesting about the uneconomics of the $10 plan. Correct? A. Yes. Q. The $10 plan was the plan that was most aggressively marketed by Mobile? A. And others, yes. Q. It was aggressively marketed by Mobile because other persons, other players in the market were marketing equivalent plans? A. Yes. Q. Mobile's focus was on that $10 plan, was it not? A. No, not its focus. Q. It marketed that plan more aggressively than any other plan operated by Vodafone, didn't it? A. It formed an important part of the marketing mix, yes, it did . Q. And that was done despite Vodafone's express concerns as to the economics of that plan? Q. Vodafone had expressed to you on a number of occasions the undesirability - sorry, its desire to have customers move away from the $10 plan. Do you agree with that? A. Yes… Q. But would you agree with me that, whether or not you recall the exact figures, a very great proportion of the subscribers signed up by Mobile were subscribers to the $10 plan? A. A large proportion were, yes… ..Q. Vodafone said to you in terms, in the early part of 1999, "We want to move away from the $10 plan", didn't it? A. Among our conversations concerning growth, yes. Q. And Vodafone said it to you time and time again during meetings you had with it, didn't it? A. Although recognising that growth was also part of the equation, yes. … Q. Vodafone agreed with your pleas, did it not, to continue the $10 plan? A. Vodafone had the right to set the tariff. Q. You asked in March, and we've been through this, you asked in March of 1999 that the $10 plan with free connection be maintained? A. Indeed, but it was not my choice as to whether it were maintained or not. Q. Vodafone went along with that, did it not? A. For its own reasons, yes, it did. Q. And it went along with that on the basis of indicating to you that, although it was prepared to leave the plan on the market, its desire was to move away from that plan and have subscribers sign on to higher value plans, that is higher value to it? A. Of course, Mobile Innovations is controlled largely by the market it operates in. Q. And Mobile Innovations, rather than signing up customers to higher value plans, continued to sign up large numbers of customers to the $10 plan? A. You aren't suggesting that Mobile Innovations had a choice in that? Q. Yes, I am. A. They are largely dictated to by the market and the customers who contact Mobile Innovations to purchase a phone. Q. And of course if, at the end of the day, the end result is that all Mobile phones (sic) could do was to sign up customers unprofitable to Vodafone, you would agree with me that the appropriate commercial response by Vodafone would have been firstly to withdraw the $10 plan from the market? A. I would suggest that by the time the letter was written in May that we're referring to that was the start of this discussion, I'd suggest that by May Vodafone were well aware of the economics of the $10 call plan. Q. They weren't aware, though, sir, were they, that your company was going to go out and sign customers in respect of which I want to suggest to you 75 percent were $10 call people? A. You will note that in my letter to I believe Dennis Webb some time earlier I refer to the suggestion that it would be sensible to test alternative call plans. Vodafone unfortunately came up with no acceptable call plans which the public found acceptable. Q. What attempts did you undertake to market the other plans Vodafone had? A. I would suggest we would have tested any number of different call plans. Q. What attempts did you market the other plans that Vodafone had in the market? A. We would have run advertisements with specific alternative call plans. … Q. I want to suggest to you that between April and September of 1999 over 75 percent of the customers signed on were signed on to the $10 call plan. A. Yet again you're quoting figures to me which I have no specific memory of. I've already said to you I believe that the majority of new customers were signing on to $10 call plans. Beyond that I could not quote the specific number. Q. And Mobile's focus was on that plan, was it - advertising and focus was on that plan? A. Mobile's focus was on acquiring a subscriber as cheaply as possible because I suspect, if I recall, Mr Bathurst, some of the call plans that were offered as an alternative to the $10 call plan were not competitive in the marketplace." [Transcript 182-186] [emphasis added] 13 December 1999 – Connection Performance Complaints 218 By 13 December 1999 Vodafone was writing to Mobile of its disappointment and concern at the connection performance of Mobile during November and December. Complaints were made that during November and December, Mobile had failed to get anywhere near the forecasted connection levels. Notwithstanding the emphasis on connection levels being achieved, Vodafone made the point that it clearly remained committed "to making Mobile… a dominant player in mobile direct marketing". [3/ 465] 219 Mr Marchbank was cross-examined in relation to the letter and gave the following evidence: Q. And you were aware that Mr Day, at least, was claiming that in November and December Mobile have failed to get anywhere near the forecasted connection levels? A. The forecasted connection levels for the business plan for that particular quarter, rather than the forecasted connection levels for the prospectus targets. Q. Do you say that you met your forecasts up to 31 December 1999? A. When I arrived in early January we were not- I can only remember being not too concerned at how far away we were from the prospectus targets as in there wasn't a huge gap between what we had delivered and what was in the prospectus. Q. When did you first come to concern that there might be a huge gap? A. When there was no business plan agreed for the March quarter because that didn't give me any perspective on what the connections were coming down the track. [Transcript 323] Mobile's Marketing Plan for January – December 2000 December 21 1999 [3/ 466] 220 Mobile's outline marketing plan for January - December 2000 [enclosed under cover of letter to Mr Day of 21 December 1999 - 3/ 466], referred to the significantly increased activity from Optus and its resellers which had been experienced during the last three months and asserted that "Mobile… is currently a lone voice selling the Vodafone brand through direct marketing channels, and is being massively outspent by the mainly Optus controlled competition". A number of propositions were presented to Vodafone including the suggestion that Mobile should sell under three brand names. [3/ 468]. 221 Apparently accompanying the letter was a draft Outline Marketing Plan for January - December 2000 [3/ 468] - which inter alia proposed that Mobile should sell under three brand names, "Mobile Innovations", "Vodafone Direct" and "V Direct". Mr Marchbank expressed the view that the idea of Vodafone Direct was that it become obvious to consumers that Vodafone had something akin to a virtual store with their telephone number which they could respond to, which was in line with what Telstra and Optus were doing at the time. [Transcript 291] This Plan also referred to Mobile as having over the past years "established itself as a strong brand name in Direct Marketing, selling mainly to entry level residential consumers". To Mr Marchbank this suggested a reference to low value consumers [Transcript 291]. The Plan continued: "[Mobile] should continue to promote entry level products on lower call plans, but rather than promoting a $10 call plan, the lowest call plan offered should now be $15… per month ". [emphasis added] 222 It was put to Mr Marchbank under cross-examination that the proposal to target the mid to high-end level subscriber, offering mid range and premium handsets on higher call plans, comprised something quite different to Mobile's traditional direct marketing target. He first disagreed. His evidence then continued: " It's a separate segment of the same market. It would be like suggesting that Ford only sell the Fiesta, a low end car, and couldn't make a sedan. Q. What I am suggesting to you is accepting that it's a different segment of the same market-- A. Yes. Q. I think you said. It was a particular segment which Mobile, at least up to that stage, had not primarily aimed to attract? A. Again, I disagree. If you go back to when Mobile first launched the market was quite immature and the only customers joining the network were what we call high value customers who were paying in excess of thousand dollars for a call set and were paying for plans that were extremely aggressive. That's how the market began and between 98 and 99 the consumer market took off and to a certain extent Mobile was almost going back to its roots by attempting to put something in place that allowed it in this new market place to sell up. Q. Would you agree with this; that in the years 1998, 1999 Mobile was engaged in direct marketing selling mainly to entry level residential customers? A. Yes, I would . Q. It was not engaged in direct marketing selling to the mid to high level subscribers offering mid range and premium handsets on higher call plans? A. Not in that period of time, no. Q. It had not engaged in that type of activity during any time when there was substantial competition in the direct channel outlet? A. Correct. Q. It had not engaged, you would agree with me, in seeking to offer the type of product which is referred to under the heading "V Direct" in subparagraph three on page 469? A. Well, clearly that was a new concept that we were asking Vodafone to - A. Because there is a difference between offering a broader range of products and I guess an increased range." [Transcript 294] [emphasis added] 223 Mr Marchbank accepted that as he perceived what was being proposed by Mobile at the time when he joined the company, in addition to Mobile operating in its traditional area, (the lower entry customers), it should seek to get customers either at the higher end through Vodafone Direct, or with the new concepts through V Mobile. [Transcript 282] 224 The same letter included reference to the increasing competition which had been experienced over the last few weeks. It also included the following "Effective Direct Marketing relies on consistent and planned spend in media, along with compelling end user offers. We fully understand Vodafone's position regarding low access charge tariffs , but only with a long-term innovative media strategy, which will in the short-term increase acquisition costs, can Vodafone's needs be met successfully in the medium to long term." 225 Mr Bramwell was asked to what he was referring in relation to the words underlined above. The answer was that he was referring to the fact that Vodafone were keen to connect customers to high call plans. [Transcript 198]. 226 He then gave the following evidence in cross-examination: "Q. No, look, please do, read that letter and read the one that preceded it, if you wish, to get the context of it. A. I think my letter referring to the connections made by Mobile Innovations actually cites a number of reasons why the connections were not as we had planned. Q. I accept that. A. Could I just run through them all? Q. By all means, yes. A. One of the most important reasons was the stop/start nature of Vodafone's planning over the period. As I made very clear in the letter, consistent planning and advertising expend tends to improve the cost of client subscribers, and Vodafone up until that period had been certainly somewhat difficult over any planning going beyond one quarter. Secondly, Optus had started to market a number of quite innovative clever ideas, which I have referred to in the letter, free time, weekend time, which were call bundles that Optus made available to customers to make their offering more attractive, and at the same time I felt that Vodafone's tariffing plans again were some way behind the competition. That is not to say that they were more expensive than the competition, but the tariff which Vodafone had the right to set under the agreement was perhaps not as attractive to an end user or to a buyer. Q. Accepting that that was your view, the fact was, was it not, it was also your opinion at the time that the higher call plans which Vodafone had on the market could not be successfully marketed through the direct channel? A. I think my exact response to that was that the higher call plans were less attractive to the end user, making them expensive for Mobile Innovations to sell. Q. And, indeed, it was becoming difficult to sell the lower call plans because of the increased competition? A. Yes. Q. And also because, as I understand your answers, of the difficulty of maintaining an adequate advertising campaign? A. More actually continuing a consistent strategy was perhaps I think as difficult." [Transcript 198-1 99] January 2000 - June 2000 227 During this period Mr Marchbank became involved in a de facto chief executive sense, pending his formal appointment at the commencement of July as chief executive. Mr Bramwell continued during this period as chief executive overseeing and husbanding Mr Marchbank into his proposed new role. On his evidence, during this period Mr Marchbank "became primarily responsible for handling the day-to-day operations of the business." [Transcript 201] 228 From the commencement of 2000 Mr Marchbank's perception was that the marketing which Optus was undertaking in the direct and the retail market was more aggressive than that of Vodafone [Transcript 290]. His evidence was also that when he joined Mobile he perceived that competition in the direct marketing channel was far more significant than it had been at the time of the May 1999 prospectus. [Transcript 293] 229 Mr Marchbank denied that he had believed in January 2000 and in the succeeding months that it was in Mobile's short-term interests to maximise new member acquisition virtually irrespective of cost per order, for the reason that it would make no commercial sense to have done so. His evidence was that whilst such an approach may have made Mobile a lot of money in the short-term, if one analysed those results one would see that it could not be a business that one could continue with. He clearly accepted the proposition that unbridled signing of new customers was a formula which could lead to ultimate disaster [Transcript 301] 230 Mr Marchbank gave the following evidence under cross-examination: "Q. You would agree with me that it was your view and as you perceived it the view of others at Mobile, at the commencement of 2000, that Mobile could not continue to operate profitably if it confined itself to the niche market in which it previously operated?… A. Mobile operating profitably was clearly one of my major concerns but what we were concerned about here was not that we didn't feel at that time that the profitability of the customers that we were acquiring was a major challenge, we thought that if Vodafone were asking us to acquire them that these customers were worthwhile having. What we did feel is that there were other segments of the market that we should balance that would bring further profit to Vodafone. I guess that was the intent behind this agreement. We felt there were segments of the market that others had perhaps opened up that we should be at least pursuing our competitors in. Q. You certainly were at least of the view that it was not commercially desirable either to Mobile or Vodafone to continue solely in the niche market? A. We would have missed opportunities had we done so. Q. You would also agree with me that as at, at least, January 2000, when you came to Mobile, no detail, costings or projections had been done in relation to the Vodafone direct proposal or the V Direct proposal? A. Not by January 2000, correct." [Transcript 295-296] First Quarter of 2000 231 Mr Marchbank early in his cross-examination gave evidence that for the first three months of 2000, Mobile operated without a business plan at all because Vodafone were actually restructuring and there were no targets set, so that Mobile were struggling to procure a target at that time. [Transcript 2/223] This is consistent with his contemporaneous email of 5 December 2000 [4/ 668EA] that: "Last year B and One Tel were our problems, along with internal Vodafone re-structures and budget limitations". 232 By early in 2000 Mr Bramwell and Mr Marchbank formed the view that MI would fail to meet the 160,000 subscriber target which it had forecast for the year ended 30 June 2000 (Mr Bramwell 20/5/02 para 50). Their view was that this was the result of Vodafone's failure both to provide effective call plans (Mr Bramwell 20/5/02 para 50; Mr Marchbank 22/5/02 para 9) and to provide a business plan for the March 2000 quarter (Mr Marchbank 22/5/02 para 11). January 2000 – V Mobile Plan 233 Mobile alleges that in January 2000 the oral agreement concerning the V. Mobile Plan was entered into. 234 Under cross-examination Mr Marchbank gave evidence: "Q. Go to paragraph 42. You will see that in paragraph 42 there is an allegation of an oral agreement made between you and Mr Day in about mid January 2000 that Vodafone will pay Mobile a management fee for subscribers connected by Mobile on the V Mobile plan as described in clauses 20.1(a) and (c)? A. Yes. Q. There was in fact no such agreement, was there? A. Yes, there was, otherwise we wouldn't have launched the plan. Q. There was no agreement between you and Mr Day that a fee would be payable in accordance with clause 20.1(a) and 20.1(c), was there? A. I'm sorry, it's probably getting into a definition of what an agreement is. My understanding is that we agreed to launch V Mobile and we were remunerated under the ASP agreement until such time as a change was made. Q. Mr Day never said to you, "You will be remunerated under the ASP agreement" until such time as a change was made, did he? A. Not in those specific terms, no. Q. Or in words to that effect? A. Well, it wouldn't have been a very long conversation had there not been an agreement that we were going to be at least rewarded for pursuing this plan." [Transcript 404 - 5] 12 January 2000 - meetings Power point presentation [3/ 471] 235 Mr Marchbank gave evidence that on 12 January 2000 he met with Mr Clubb and Mr Day to discuss the competitiveness of Mobile's offers and the steps needed to increase sales. He presented a power point presentation at the meeting [3/ 471 - 497]. This presentation throws up many of the parameters of business concern at this time. It certainly showed that Vodafone on average was securing a considerable less number of subscribers than its principal competitors [3/ 475]. It also gave various statistics in relation to the direct channel [3/ 477]. It also made the point that one brand of channel was insufficient for a segmented market in terms of the multitude of competing offers to new and replacement users [3/ 478]. In relation to [3/ 479] the conclusion was in the following terms: · "Freetime is well understood and provides Optus with a compelling USP, denies Vodafone from penetrating 'consumer groups'; · Competitors in Direct more balanced on connection volumes vs controlling cost per connect (ie targets are volume based); · Vodafone the only carrier without their own 'branded' direct channel; · Well branded & differentiated direct channels generate volume (B); · New Carriers (locked out of retail channels) likely to innovate in this area (eg. Virgin)." 236 Mr Marchbank gave the following evidence under cross-examination: "Q. In essence was this the position, that you were saying to Vodafone you have got to make a choice. You either reduce costs with the consequent reduction in volume, or you increase volume but a by-product of that will be increased costs? A. I don't think it is quite as black and white as you are suggesting. Q. What qualification do you want to put on the proposition? A. I guess what I am saying is there is always a balance between how many connections you required and what type of customers you require. You can't say you want 20,000 connections and then put in a base plan that may meet your internal cost targets but may not attract a consumer. You will go out and spend money trying to attract those customers, but if you don't benchmark against the competitive costs in the marketplace, you are not achieving it. There has to be some sort of correlation between the two. [Transcript 306] [emphasis added] 237 Mr Marchbank's evidence included that during the meeting the following was said: "Mr Marchbank: "To be cost effective and drive connections we need to use 2 brands and sell more attractive plans with Nokia phones." Mr Clubb: "We agree with your understanding of the direct market and that it has become more competitive. However we have a problem matching the competition's pricing and maintaining market share here." Mr Marchbank: "Mobile Innovations need the ability to do at least 6,000-8,000 new connections a month, as Vodafone originally committed to prior to our float, otherwise Mobile Innovations will not meet its prospectus forecasts, which would seriously damage both Mobile Innovations' and Vodafone's reputation." Mr Clubb: " Due to the integration of Vodac and Vodafone Network, we are in a hell of a mess. From a marketing perspective we have yet to consolidate all our plans so leave it with me . I understand your requirements. In the meantime work with Mr Day on getting some new more competitive plans into the market along the lines of what you have just shown me." [emphasis added] Web site Proposal 238 Mr Marchbank also gave evidence of another meeting of 12 January 2000 between himself, Mr Clubb and Mr Selkirk. His evidence was that the following conversation occurred: "Messrs Clubb/Selkirk: " We need Mobile Innovations to start a Vodafone branded web-site which has e-commerce & fulfilment capability. How quickly could you do this?" Mr Marchbank: "We are working on a site exactly like this at the moment for launch in March/April. However its Mobile Innovations branded, but I guess we could look into changing it to the Vodafone brand quite easily if we get some period of exclusivity." Mr Selkirk: " Tell us you can do it by the first of April and it's yours." Mr Marchbank: " I'll come back to you with a proposal but it is my understanding that it is just changing the branding." 17 January 2000 - Letter 3/ 498 Mobile to Vodafone 239 On 17 January 2000 Mr Marchbank wrote to Vodafone referring to Mobile's plan to begin marketing V Mobile, essentially to test the concept, in February. The letter attached a proposed tariff for Vodafone's consideration. Vodafone was being asked to consider a number of new products and a number of new plans. [Transcript 309] 19 January 2000 3/ 506 240 Mr Marchbank wrote to Vodafone with respect to a number of further matters on 19 January 2000 [3/506]. This dealt with the online proposal and other matters. Part of this proposal was that Mobile would handle all Web based advertising for the Vodafone e-commerce site. Mr Marchbank proposed that such management would be done in accordance with the ASP. This was effectively a fixed amount per subscriber. The proposal was that development costs would be charged on hand sets and on an at cost basis. [Transcript 314] February 2000 241 In about February 2000 Mobile put together a business plan for V Mobile [3/538]. This was a document intended as a discussion document for a meeting. It had been prepared by Mr Marchbank. It included reference to the fact that the increasing competition experienced over the last few months had taken Mobile by surprise. Reference was made to a particular competitor in the direct marketing area who had come in at very low prices through highly aggressive marketing. The same document set out cost to manage at $7/customer if billed monthly and if billed quarterly, a decrease in the CTM down to $5.50 and $5.00. [Transcript 319] Mr Marchbank gave evidence that he had agreed to these figures which were being suggested. He had worked those figures out on the basis that the arrangement, if launched, would be profitable to Mobile. [Transcript 319] 8 February 2000 – end of year financial freeze complaint 242 On 8 February 2000 Mobile [Mr Marchbank] again wrote with a string of complaints, suggesting that it was experiencing major problems with the perceptions of the many people whom it dealt with within Vodafone of whom none effectively had had any experience or history in managing Mobile. The letter inter alia complained that the costs which Mobile incurred had been misinterpreted by the "new management" which Mobile said it had inherited after the integration of the Network. The letter suggested that a basic problem had arisen in terms of the comparison made internally in Vodafone suggesting that the cost to acquire a customer through Mobile versus a retail store was unfavourable. The letter complained that: "From a marketing perspective we are moving forward slowly, but having had an extremely disappointing January, we are now looking at a bad February (all media deadlines have been missed) and hence we need to take immediate action in order to influence results in March. As such, Mobile is unable to promote a more competitive marketing offer due to the inertia in Vodafone created by the 'end of financial year' freeze, and perceived cost in effectiveness of this channel." [3/ 514 et seq]. Misfit in Vodafone's distribution strategy 243 Mr Marchbank accepted from the terms of the letter and its reference to Mobile seeming to be a misfit in Vodafone's distribution strategy or being deemed too expensive as a channel to market, there appeared to his mind at the time to be a perception at Vodafone that Mobile was too expensive as a channel. [Transcript 309] Mr Marchbank had stated in the letter that the problem arose because of a comparison made internally in Vodafone that a cost to acquire a customer through Mobile against a retail store was unfavourable. Mr Marchbank's position as expressed in cross-examination was: "My position was that 90 per cent of the costs involved in acquiring a new subscriber relate to advertising or channel costs and the handset in terms of pure acquisition and the people who are running Vodafone at the time in the sales and marketing area hadn't dealt with a direct channel before and were basically mis-analysing our costs, so we were basically - our costs to acquire was being driven by the competitive marketplace, not by any blow out in cost in Mobile Innovations." [Transcript 309] 244 The letter went on to set out a number of specific matters which it was suggested required to be resolved. Channel Conflict 245 Ms Statham gave evidence under cross-examination about what she understood the channel conflict to be and the consequence of it: "A. I believe where you wanted to introduce Vodafone Direct, any direct point of advertising needs to be a point of differentiation, which was probably likely to be in the form of a better plan, a better value package, which differentiated it from the retail stores and the dealers, so the channel conflict as I understood was Vodafone didn't want to upset the dealers or their own stores by giving Vodafone Direct an offer that was far greater than what their stores would have. Q. Because Vodafone, the problem being, at least as you understood it from Vodafone's point of view, to achieve, as it were, a mix acceptable across all range of distribution channels? A. I don't understand that question. Q. Initially any proposals as to Vodafone Direct were shelved, were they not, because of channel conflicts? A. I believe so. [Transcript 537] 8 February 2000 3/ 517 246 A response from Vodafone of 8 February 2000 dealt with aspects of the e commerce proposal. [3/ 517] 247 Mr Marchbank received a specific letter relating to the e commerce issue of 9th February 2000. 10 February 2000 3/ 519 248 On 10 February 2000 Mr Marchbank responded to the 8 February 2000 letter dealing with the contentious points one by one. He pointed out for example that there was a typographic error in relation to the initial figures and that there were some questions of joint ownership of source code raised. These letters were part of the ongoing process of negotiation. [Transcript 315] 15 February 2000 3/ 524 249 On 15 February 2000 Mr Clubb responded to Mr Marchbank's letter of 10 February. 24 February 2000 – 5/ 528 250 On 24th February 2000 Mr Marchbank sought to set out the agreed points in relation to the e commerce issue in a detailed letter requesting that it be countersigned by Vodafone [3/ 528]. The letter was never in fact countersigned. [Transcript 315] 6 March 2000 251 On 6 March 2000 or at about this time a meeting took place between Mr Marchbank, Mr Ogrin and Mr Bramwell. Mr Marchbank gave the following evidence in this regard: "A. I think we discussed the lack of the business plan and the marketing opportunity in the market at the time. Q. Do you remember anything specific said about the lack of a business plan? A. Off the top of my hand sitting here, no, I don't remember anything specific. Q. Do you remember Mr Bramwell saying to Mr Ogrin that he was sure that he, Mr Ogrin, had good intentions for helping us to get the channel moving but there was a more immediate issue which needed to be resolved? A. Yep, I do remember that. Q. Do you remember was the immediate issue the shortfall in subscribers? A. No, it wasn't, it was the lack of business plan. Q. I want to suggest to you that Mr Bramwell said that he was sure that Mr Clubb had briefed him, Mr Ogrin, about the ASX forecast and that he wasn't interested in any other plans until we resolved the shortfall of 30000 customers, do you remember that? A. I remember that being discussed but not in the context that you describe. Q. In what context do you say it was discussed? A. Mobile Innovations were effectively a rattled ship waiting to get a plan for the current quarter, the lack of a plan led us into a position where we couldn't forecast where we would end up. We didn't know whether we would have a shortfall or go over that forecast. There was an agreement for an additional amount of customers to be assigned to us that was of great concern for us that that agreement followed through. It was on the agenda, I don't remember it being- what's the word - the first thing on the agenda over and above the lack of a plan for the quarter we were in. Q. Let me try and make this clear; do you say at the time you had your first meeting with Mr Ogrin there had already been an agreement to - I withdraw that. For Vodafone to support Mobile by the transfer of 30000 customers? A. To be honest I can't remember the chronology right now, whether that was when I first met Mr Ogrin or shortly after I first met Mr Ogrin. Q. I want to suggest to you that while that matter had been discussed prior to this meeting there had been no agreement reached on that issue by your meeting with Mr Bramwell and Mr Ogrin, do you agree with that? A. I can accept that, yes. Q. And Mr Bramwell was, as you recall it at the meeting, very concerned to get an additional 30000 customers so the forecast could be met? A. I think we were concerned in the first instance to get a subscriber forecast that put us into a position to forecast whether we were on target or not on target for our prospectus forecast." [Transcript 321 - 322] 8 March 2000 - Website Agreement 252 A letter of this date was sent by Vodafone concerning the proposal. The letter is headed with the words "Heads of Agreement". Mr Marchbank gave evidence that he proceeded upon the basis that what was contained in this letter was what was agreed upon. [Transcript 316] Early March 2000-Discussions concerning migration of 30,000 additional customers 253 Mr Ogrin gave evidence by affidavit of a meeting which took place on about 6 March 2000 [appendix XX page 38] as follows: "48. Later that day, I met with Mr Bramwell, Mr Shaw and Mr Marchbank at MI's offices in Forestville in order to introduce myself to MI for the first time. 49. During the course of that meeting the following exchange occurred: Mr Bramwell: "Welcome to MI. I'm sure you have good intentions for helping us get this channel moving but we have a more immediate issue that needs to be resolved." Messrs. Bramwell/Marchbank: "In all fairness Julian, Vodafone have sent us many guys before you without any results." Mr Bramwell: "I'm sure Gordon's briefed you about our ASX forecast. Basically we are not interested in any other plans until we resolve the shortfall of 30,000 customers. This is a priority to us." Mr Ogrin: "Gordon has told me about this and has asked me to take it on board. I will address this as a priority but I also want a commitment that we can together grow this business and drive some efficiency in the business." Mr Bramwell: "I appreciate that. But understand that we are not moving forward until Vodafone provides us with a solution that is strong enough to communicate back to the ASX next week." Evidence of Mr Bramwell 254 Under cross-examination Mr Bramwell recalled discussing 30,000 subscribers as part of the meeting. He recalled that the issue about the 30,000 subscribers was that Mobile had given certain forecasts to the market which could not be achieved. He had been concerned about the effect that such an announcement would have on Mobile and also Vodafone in their upcoming financial year. He denied having told Mr Ogrin in effect that Mobile were not interested in any other plans until they resolved the shortfall of 30,000 customers. [Transcript 201]. His further evidence under cross-examination included: " Q. And I want to suggest to you that Mr Ogrin said he had been told about it and taken it on board "but I want a commitment that we can grow the customers and drive some efficiency in the business"? A. I don't recall those as being his words. I do recall quite clearly that the 30,000 subscriber transfer was part of the discussion but we were equally keen to discuss our marketing plans for Mobile Innovations. Q. The 30,000 transfer was, was it not, a matter that you regarded as critical to Mobile at the time? A. Among other things, yes. Q. And you wanted that resolved before anything else was resolved, didn't you? A. No. Q. And you told Mr Ogrin that, I suggest to you? A. No, I didn't. Q. You wanted, in effect, Vodafone at that stage in some way to give you a further subsidy by transferring 30,000 customers to you? A. Is that not two questions, Mr Bathurst? Are you saying did I want Vodafone - Q. You wanted Vodafone to arrange the 30,000 customers to be transferred, correct? A. Correct. Q. You understood that they had no contractual obligation to do that? A. No obligation, no. Q. You are in effect asking for a present, correct? A. Vodafone accepted that the need to transfer the 30,000 subscribers had been brought about by their somewhat stop/start and confused acquisition policy over the previous months. Q. Mr Bramwell, you have just accepted the proposition that as you understood it Vodafone had no contractual obligation to transfer 30,000 customers, correct? A. No contractual obligation, no. Q. You said before that in part your failure to achieve connections was due to the stop/start approach of Vodafone, but you would also agree with me that it was because of increased competition, particularly from Optus? A. Well, my argument is the increased competition from Optus could have been handled better had Vodafone adopted a coherent strategy running up to the period in question. Q. The strategy that you wanted adopted was more attractive products on the market, correct? A. I think and also - yes, indeed, yes, part of it. Q. And Vodafone were, in 1999, unwilling to make such offerings? A. Unwilling? I felt that Vodafone - well, I felt that Vodafone were - Vodafone had just gone through a significant change in the late - had yet again changed management completely and it had gone from one institute to another and Vodafone seemed unclear about what offerings they proposed to make. They promised offerings which didn't materialise for whatever reason. Q. Shortly thereafter you received, did you not, from Mr Clubb, a letter offering the 30,000 subscribers? A. Yes, I did." [Transcript 201-203] 9 March 2000 - Draft Letter of Intent [3/ 551] 255 MI formally raised the possibility of making a claim for breach of the ACM agreement with Vodafone on 9 March 2001 (TB790-2). The topic of the ACM agreement was, however, discussed "from time to time" in the intervening period. [Mr Marchbank Tr 365/43-8] Approximately 10 March 2000 - Draft Announcement to Market 256 A draft announcement to the market was prepared about this time. Mr Marchbank participated in the drafting of the announcement. Mr Marchbank gave the following evidence: "Q. You will see there that - I appreciate this is a draft - that Mobile announced the first half profit after tax of 2.2 million dollars, this was achieved on a revenue basis of 22.4 million, then you go on to say, "The company is confident it will meet the subscriber of those in numbers forecast in the IPO document forecast for the year ended 30 June 2000. However, it is expected that due to increased competition full year profits will fall short of its existing forecast." Did you draft that? A. I was involved in drafting that. Q. What was the basis, at that stage, that you considered that Vodafone, sorry, that Mobile would meet its subscriber number forecast? A. The plans that we were putting in place for Vodafone Direct and V Mobile and Mobile Innovations and the enthusiasm/encouragement that we had received from Vodafone. Q. If that was the case, of course, there would be no need for 30000 subscribers to be transferred from Vodafone to Mobile? A. Well, there are many ways in which you can achieve your subscriber forecast; acquisition, a new contract to manage existing customers. What we agreed with Vodafone is that we would have 160000 customers at the end of June. Q. The position was this, was it not, in March; Mobile was concerned that it would be unable to meet its prospectus forecast, you agree with that proposition? A. Yes. Q. I should put it more precisely to you; in respect of the number of connections? A. Yes. Q. The shortfall in forecasts was due to two things, I want to suggest to you, in your mind; firstly, problems which had existed in January and February because there was no budget or no plan and; secondly, increased competition which had emerged? A. That's correct. Q. You sought- that's unfair- Mobile sought a solution whereby it, in effect, would be given 30000 customers from another base of Vodafone's? A. I believe it was actually, the proposition was tabled by Vodafone." [Transcript 324] 257 The draft was agreed [Marchbank cross-examination 326] 13 March 2000 Mr Marchbank sent an e-mail on 13 March recognising the need for discussion in relation to a number of technical questions concerning the proposed transfer of customers from the initial batch of 30,000. [Transcript 327] 16/20 March 2000 – Additional Customer Management Agreement 258 The same period sees the signing of the two-page 20 March 2000 Additional Customer Management agreement [the letter itself was dated 16 March but signed on 18 and 20 March] [3/ 559] whereunder Vodafone agreed after earlier discussions to provide Mobile with 30,000 additional customers in respect of which Mobile would undertake customer management services. This is the agreement which forms the foundation of claim 1. The 30,000 Additional Customer Management agreement was plainly of significance to Mobile as it had included calculations based upon the agreement in its announcements to the marketplace/initial public offering [see 3/ 604D]. The short position is that although Mobile complained bitterly thereafter at Vodafone not complying with this agreement [see for example the letter from Vodafone of 10 May 2000 (3/ 578) making quite plain that the 30,000 migration of subscribers proposal was not a viable option], it simply allowed the dispute to lapse or to become quiescent not raising the matter again until March 2001. Mr Bramwell gave evidence that Mobile had not intended to give up its legal rights in relation to the matter but was simply awaiting developments on a number of fronts in order to make up its mind in due course as to whether or not to press what it regarded as its legal rights in this regard. 259 The letter/Agreement is in the following terms: "Vodafone and Mobile Innovations – Additional Customer Management Nigel Bramwell As per our discussion, this letter sets out the terms upon which Vodafone has agree to provide Mobile Innovations with 30,000 additional customers in respect of which MI will undertake customer management services (as set out in the ASP Agreement). 1. Vodafone agrees to have all these relevant customers available for Mobile Innovations to commence billing by no later than 30th June 2000. 2. Vodafone will provide Mobile Innovations with these extra customers through one of the following options, to be elected by Vodafone: - Migrating existing Vodafone billed customers to Mobile Innovations for billing management & customer care. Or/ - Providing Mobile Innovations with the responsibility to manage billing & customer care of new customers connecting to Vodafone. Or/ - Combination of Migrating existing Vodafone billed customers & provision of new customers connecting to Vodafone for the purpose of billing management & customer care. 3. Effective from the 1st June 2000, Mobile Innovations will charge Vodafone the following cost to manage rates for all customers: - Quarterly Billed Customers $4.75 - Monthly Billed Customers $7.00 This excludes current cost to manage rates for low tariff customers as per detailed in the amended agreement. Vodafone would negotiate a separate cost to manage rate for monthly billed customers if it were to propose Mobile Innovations managing new, monthly billed, customers connecting to Vodafone network in excess of the 30000 customers committed. 4. Should Vodafone choose one of the migration options outlined above, Mobile Innovations will use best endeavours to transition all (current and migrated $10 monthly billed customers) to quarterly billing by 1st July 2000. 5. MI must undertake the customer management services for the benefit of these customers as Vodafone's agent in accordance with MI's obligations under the ASP Agreement (as amended). Prior to Vodafone providing these additional customers, please confirm MI's acceptance of these terms by signing and returning a duplicate copy of this letter, as indicated below." [559 –560] [emphasis added] 260 Emphasis was placed during cross-examination of certain witnesses upon paragraph 4. In this regard the cross-examination of Mr Bramwell included: "Q. And Mobile agreed, if you go to the next page, to use its best endeavours to transition all current and migrated $10 monthly billed customers to quarterly billed from 1 July 2000? A. Yes. Q. What did Mobile do to transition those subscribers to monthly billings - to quarterly billings? A. The reference to migrating subscribers to being quarterly billed is a reference to the 30,000 subscribers which were to be the subject of the transfer. So as we never received the subscribers, we clearly couldn't move them onto quarterly billing. Q. Mr Bramwell, you don't seriously believe that is what this letter says, does it? A. Yes, I do. Q. It says "will use its best endeavours to transition all the current and migrated $10 monthly billed customers", does it not? Page 560. A. To be honest, my reading of it is that it referred to the $10 subscribers to be transferred by Vodafone, but I agree, the statement calls for the billing - it is a little confusing because by and large by that time I believe that pretty well all the $10 call subscribers of Mobile Innovations were being billed quarterly…. Mr Bathurst: Q. Mr Bramwell, I want to ask you this question: Regardless of whether you had a contractual obligation to do so or otherwise, would you agree with me that from the period between 16 March 2000 and at least up to the time when you left the position of chief executive officer, Mobile did not make any attempt to transfer all current $10 customers to quarterly billing? A. I believe that Mobile Innovations did it because it is in their best interests to do so." [Transcript 203/205] 261 Mr Marchbank gave the following evidence under cross-examination: "Q. Had those options been discussed between you and anyone from Mobile prior to the receipt of this letter, as you recall it? A. Absolutely. Q. When did those discussions take place? A. Well, during the period when we were discussing with Vodafone, this is an option we were discussing, the feasibility internally to Mobile Innovations. Q. And what was also proposed, if you look at three, was that effective from 1 July Mobile will charge Vodafone the following cost to manage rates for all customers, excluding current cost to manage rates below tariff costings. Do you remember that? A. I do. Q. And do you recall - I withdraw that. You would agree with me, would you not, that Mobile never charged those rates from 1 July - did not charge those rates from 1 July 2000 onwards? A. It was conditional on the customers being transferred. Q. Then you go to page four, paragraph four, should Vodafone choose one of the migration options outlined above, Mobile Innovations will use best endeavours to transfer all current migrated $10 monthly billed customers to quarterly billing by 1 July 2000. No effort was ever made to transfer all current monthly billed customers to quarterly billing, was it? A. I think the customers referred to were the customers to be transferred. Q. The document says, doesn't it, "current and migrated monthly bill customers", you understood that to include current customers, didn't you? A. Sorry, can you refer me to which part? Q. Paragraph four on page 560. A. That's correct, you are correct. Q. And just on that, if you can go back to the draft I showed you a moment ago you will see that there is a difference in wording between paragraph four on page 560 and paragraph five on page 552. Do you recall being involved in any discussions which led to that change of wording? A. Clearly not, no. This letter was addressed to Mr Bramwell." [Transcript 328] 3 April 2000 3/ 563 262 As at 3 April Mr Marchbank was still writing seeking to discuss how the subscribers would to be transferred because he knew that there was a lead time required to undertake the transfer. This was not because he believed that there were some potential problems remaining in undertaking the proposed transfer. [Transcript 328 and 329] 263 At about this time Mr Marchbank was having discussions with Mr Ogrin about the V Mobile concept and gave the following evidence under cross-examination: Q. The V Mobile concept was one which didn't require customers to agree to a contract period, was there? A. That's correct. Q. Was there to be a subsidy of the handset? A. No. Q. There was to be no monthly access fees? A. That's correct. Q. So the position, in effect, was this, that if there was no calls made, although Vodafone would not have had to subsidise the handset they would still be left with the costs of acquiring the customer, and the cost of managing the customer without any return? A. That's correct. Q. And you discussed, did you not, the V Mobile issues with Mr Ogrin in late March and early April of 2000? A. That's right. Q. Do you remember Mr Ogrin telling you, firstly, that it looked like he was going to get approval on V Mobile but we were going to have to live with the marketing budget with a minimum brandage? A. Yes. Q. You objected to that saying you needed to spend a considerable amount of money and give it a fair go to drive up awareness? A. That's correct. Q. Mr Ogrin indicated he was concerned about the impact it could have on Vodafone's existing business and he only proposed to ease it into the quarter and review it for the next quarter's budget? A. That's correct. Q. Would you agree with me that when it was launched there were two V Mobile plans on offer; the first involved the customer purchasing a handset, the second involved only acquiring a SIM card? A. That's correct. Q. At the start would you also agree with me that it was proposed only to market the V - at that time would you agree that there was two ways, as it were, of direct marketing products, one being above the line, the other being below the line? A. Correct. Q. And above the line, would you agree, means the product is marketed by advertising it in the media? A. Generally, yes. Q. Perhaps more accurately by some sort of third party advertisement, be it the media- A. Yep. Q. And below the line is where the marketer, in this case Mobile, was authorised to sell the plan to potential customers who had responded to other offers? A. I guess how I would describe below the line, I am not sure it is different to how you are describing it, basically, not overtly advertised, direct mail or an affinity program where you target the specific customers and you don't see it advertised so you can put more competitive offers in without disturbing other channels, that's the general difference. Q. As at the launch of the mobile would you agree with me that the above the line advertising was limited to the plan with the handset as distinct from the SIM only plan? A. I do. [Transcript 329/330] 4 April 2000 264 On 4 April 2000 Mr Bramwell wrote [3/ 563A] to Mr Ogrin following discussions of the previous week indicating that he had had the chance to discuss the ASP contract internally. 265 Mr Bramwell accepted under cross-examination [Transcript 209] that in this letter Mobile sought certain benefits over and above those which were contained in the ASP, namely: · a fixed scale for subscribers which would provide Mobile with certainty of revenue and avoid dispute as to costs; · provision for Mobile being reimbursed for upgrades to cover both budget and cash flow issues; and · some mechanism to be reimbursed in respect of credit card fees on high calling subscribers. 266 Mr Marchbank was asked about the letter to Mr Ogrin in cross-examination. [3/ 563A-3/ 563B] [Transcript 400] 267 On 4 April 2000 Mobile wrote to Mr Ogrin [3/ 604D]. The letter covered a number of suggested changes to the contract apparently following discussions held the previous week. These included the following: " High Plan Credit Card Charges There is something of an anomaly in the ASP Agreement which means that there is a positive disincentive for Mobile to sell higher call plans. In short Mobile pay all credit card merchant fees relating to collecting subscriber debts. This is fine for average spenders, but if you take the example of a subscriber on a high call plan billing more than $250 per month to an American Express card, Mobile would actually be paying more than $7 per month in merchant fees. We need a mechanism to reward the recruitment and up selling to higher call plans." [Emphasis added] 268 It was put to Mr Bramwell that at the time there was a real disincentive to Mobile to sell higher call plans. His evidence was that this proposition was not correct and that the letter referred to extremely high spenders. His evidence was that he used an example in the letter, the $250 call bill, which in the Australian market was fairly unusual. His evidence included: "Q. The reward you wanted was for Vodafone to wear this cost, wasn't it? A. To wear the merchant fee on high spenders? Q. Yes. A. Yes. Q. But what you were talking about is higher call plans generally, were you not? A. No, I was referring to the particularly high spenders. For normal call plans the merchant fee was not of great significance. Q. But any part of the merchant fee reduced the $7, didn't it? A. It did, but by and large the higher call plan subscribers were more profitable to Mobile Innovations anyway. Q. Why do you say that? A. For the simple reason that at the time, certainly during 1999, most of the low spend call plan customers had been put on to quarterly bills and in agreeing with Vodafone the cost to manage for quarterly bills, as you'll see referred to in some of my earlier correspondence, Mobile Innovations had foregone some margin to do so. So by and large, with the exception of extremely high callers, which are very unusual, Mobile Innovations earned a higher margin on the higher call plans which were billed monthly. Q. So it was wrong to tell Mr Ogrin that there was a positive disincentive to sell those plans? A. No. Q. Well, I'm sorry, I'm just trying to understand your position. I thought you said that in 1999 you did better on the higher call plans than the lower call plans? A. Maybe the issue is the definition of higher call plans. At the time there were some call plans with extremely high access charges available. Q. But that's not what you said, is it? A. I think that's what I meant, Mr Bathurst. Q. And you certainly didn't indicate to Mr Ogrin that you were better off on the higher call plans in the context where you said there was a positive disincentive to sell them, did you? A. I disagree. Q. Where in that letter did you say that you earned a better margin on the higher call plans? A. I would suggest that Mr Ogrin was fully aware of the economics of the subscribers. [Transcript 189]… Q. Well, you agree with me that you weren't suggesting - do you agree with me that you weren't suggesting in subparagraph (b) on page 563C that the positive disincentive only arose in the case of extreme examples of people spending more than $250 and using their American Express premium credit card? A. I was trying to highlight an anomaly by using an extreme case." [Transcript 192] Q. You see, I want to suggest to you that Mobile's marketing strategy throughout the period 1999 up to 2000 was to focus on low call plans? A. That's not the case. The reason is simple. Most higher call plan subscribers bill probably an average of $50 to $60 per month. By and large most of them pay by Visa or Mastercard. The merchant fees on Mastercard are considerably lower than American Express and therefore a monthly billed higher call plan subscriber would earn Mobile Innovations more money than a quarterly bill of a low value subscriber on which Mobile Innovations had already foregone margin." [Transcript 193] 269 His cross-examination became particularly pointed when the following evidence was given: "Q. I want to suggest to you that when you said what you said in the first sentence in subparagraph (b) on page 563C, that there was a positive disincentive for Mobile in respect of higher call plans, that statement was entirely accurate. Do you agree with that? A. Could you ask the question again, please? Q. Yes, what I want - go back to the page, page 563C. What I want to suggest to you is that where you said in the first sentence there is a positive disincentive to Mobile Innovations to sell higher call plans, that statement was entirely accurate. Do you agree with that? A. As I've already said, perhaps it would have been better to have put the "highest call plans". Q. I want to suggest to you that one of the reasons that Mobile - I want to suggest to you firstly that Mobile's marketing strategy was in fact to focus on the lower call plans, in particular the $10 plan. Do you agree with that? A. I absolutely refute that. Q. I want to further suggest to you that the reason that it did that was because it made more money out of it? A. That's absolutely not the case. HIS HONOUR: Q. If the statistics and figures, which are presumably quite objective - there must be a lot of paper on this-- A. I'm sure. Q. --do reflect some of Mr Bathurst's questions to you such as, over particular periods of time, I think he said up to 70 percent even being $10 call plan sales-- A. Yes. Q. Then how is it that you are so firm in your refuting the proposition that there was this special focus and attempt to focus on these plans. I'm just a little unclear on why you're so positive about that. A. Indeed. I think given the alternative or given the opportunity, Mobile Innovations would have been very happy to have connected higher call plans. Q. You're not being asked about opportunities or anything like who was right and who was wrong in the intercompany exchange, et cetera, right now certainly by me. A. Mm. Q. It's simply the, as it were, lack of connectivity or correlation between the statistic and your proposition that Mobile was about promoting these plans. Are you trying to say that Mobile was effectively by some route - I don't really ask you to tell me - in the intercompany negotiations and arrangements inhibited from moving away from these plans. Is that what you're trying to say? A. I think in some terms, yes. Mobile Innovations clearly operated in a competitive market and the nature of the advertisements is that subscribers or potential subscribers are invited to call in response to an offer made. Q. Yes. A. We made attempts when the caller rang to upsell them to a higher call plan because, as I stated in an earlier answer, other than extreme call plans as outlined here, monthly billed, $7 per month subscribers, were more profitable for Mobile Innovations than $10 quarterly bill subscribers, so we were to a large extent market driven and we were also somewhat hampered by the lack of an attractive alternative tariff plan from Vodafone. Q. So is your proposition that, to your recollection, when the phone call would come in the marketer from Mobile would make efforts to achieve a higher call plan than $10 but mostly be in receipt of a firm statement, No, that's what I want, and that's what was then to happen. Is that what you're putting? A. Indeed, yes." [Transcript 194 - 196] 270 Mr Bramwell gave evidence that the marketers were given instructions to make efforts to achieve higher call plans than the $10 plan but could not recall whether those instructions were in writing. His evidence was that it was firm company policy to upsell call plans [Transcript 196]. In particular his evidence was that it was firm company policy that any person who called to ask to enter into a lower call plan was offered a higher call plan. He believed that there were notes to ASP meetings and that in one of those meetings the policy of up-selling subscribers was discussed and Mobile's policy was outlined. [Transcript 196] A call was made by the defendant for any document in which that policy was outlined but no such document was produced. [Transcript 197]. Indeed both sides made the same call upon one another. The Strategy Document 563E 271 A Strategy document which received some attention. [Transcript 339 and following] is to be found at 3/ 563E. 7 April 2000 E-mail Marchbank to Ogrin 3/ 564 272 On 7 April 2000 Mr Marchbank sent an e-mail to Vodafone which included the following: "Just a file not to you – that we have many legal & commercial issues designated as work in progress & unresolved. We have now gone live with V Mobile and e-commerce all of which have various loose ends we need to address soonest. We hear verbally from you that there are issues with V Mobile. It's important to resolve these earlier rather than later, and for you to write to us and identify what these are. We have also written to you to correct the 'term' (12 months + 3 month termination period) of the e-commerce agreement. Vodafone have yet to acknowledge this. Vodafone Direct and V Mobile have yet to integrate into the ASP agreement (as this is how we are currently operating) and as such most of our instructions have been received verbally." [3/ 564] 11 April 2000 3/ 564A 273 An e-mail of 11 April 2000 to Mr Marchbank from Ms Statham made the point that "Vodafone Direct-OTP-they want to launch on 27 April however they are having a big think about the whole Vodafone Strategy going forward." [3/ 564A] 274 Under cross-examination Ms Statham gave the following evidence: "Q. And then points discussed, Vodafone Direct off the page, they want to launch on 27 April however they are having a big think about the whole strategy going forward. What do you recall being said at the meeting about that issue? A. I don't recall any exact words. Q. I accept that. Do you recall the substance of what was said or do you have no recollection at all? A. I don't have any recollection actually. Q. Does it help you to look at the next paragraph starting "they are thinking of doing umbrella advertising"? A. Yeah, that would probably cause us to think that maybe that they were rethinking what they wanted to do with Vodafone Direct as a brand. Q. Was it your perception at that time, at least within the minds of those people to whom you spoke, they were concerned - they still had no fixed ideas as to how best to use Vodafone Direct? A. I would agree with that, yeah." [Transcript 537 – 538] 12 April 2000 3/ 564B 275 By 12 April 2000 the V Mobile project was up and running. [Transcript 332] 18 April 2000 276 An e-mail of this date was sent from Mr Marchbank summarising a further discussion in relation to the 30,000 migrations. Although Vodafone had had a period of time, if the migration was to be achieved it came as no surprise to Mr Marchbank that they needed a further period of time to do it. [Transcript 333] 277 It quickly became apparent that Vodafone were either unwilling or unable to carry out the transfer. On 18 April Mr Wisbey, (Vodafone's account manager for MI - he reported to Mr Ogrin) and Ms McDonald (a Vodafone Finance department executive - she was also not called by Vodafone) told Mr Marchbank that there were "operational obstacles" and that "we don't think it is possible" (Mr Marchbank 22/5/02 para 16). Shortly later Mr Clubb told Mr Marchbank that the transfer would not happen "unless you pay our costs, which may be substantial" (Mr Marchbank 22/5/02 para 18). Early May 2000 278 In early May 2000, Mr Marchbank received a long form agreement from Vodafone. 279 In May 2000, Vodafone paid Mobile Innovations $430,000 for developing the website (3/599; Mr Stonell 25/6/02 para 114). The timeline which then unfolds on the migration issue 280 As the timeline unfolds it is apparent that Mr Ogrin investigated the issue. He came to the conclusion that it would take a long time and be extremely expensive for Vodafone to implement (Mr Ogrin 22/11/02 para 97 – 108). Vodafone took the position that it would not perform because "it was difficult and expensive" (Mr Ogrin Tr 1027/14-24; 1028/19-23). As the timeline also establishes, Vodafone's refusal to transfer the customers was confirmed in a series of letters during May between Mr Marchbank and Mr Bramwell for MI and Mr Clubb, Mr Ogrin and Mr Buckling (Vodafone Pacific's Finance Director) for Vodafone (TB572, 573, 576-7, 578-9, 581-2, 585-7 and 591). In his letter dated 19 May 2000 (TB591) Mr Clubb took the position that the letter agreement of 16 March 2000 (TB559) was never intended to commit Vodafone to incurring significant costs or administration time and it was not prepared to do so. It was also confirmed at several meetings involving, amongst others, Mr Clubb and Mr Ogrin (eg a meeting on 21 May 2000 - Mr Ogrin 22/11/02 para 109). In his letter to Clubb of 19 May 2000 (TB952) Bramwell maintained the binding nature of the agreement. Most of The letters and meetings are generally referred to hereafter. 281 MI, while content to consider alternative arrangements, maintained the position that, unless the issue was resolved, it must give full consideration to its legal rights, including instituting proceedings for damages (eg TB581, 594A; Mr Marchbank 22/5/02 para 21). Indeed that threat was sufficient for Mr Bissex (Vodafone's Managing Director – he was also not called by Vodafone) to phone Mr Bramwell in exasperation and promise to try to find a solution in late May (TB587B, 593-4). No solution was found. As will also be seen, at a meeting with Mr Clubb and Mr Ogrin, Mr Bramwell and Mr Shaw (a MI non-executive director), having apparently accepted that Vodafone refused to perform, "left the agreement open and reserved their rights" (Mr Marchbank Tr 363/24-30; 366/27-37; Ogrin Tr 1030/55-58). Mr Ogrin and Mr Marchbank were to meet to develop some strategies (Mr Ogrin 22/11/02 para 109; Mr Bramwell Tr 213/30-32). 2 May 2000 – Repudiation of Migration Agreement 282 On 2 May 2000 Vodafone wrote to Mobile [3/ 578] making plain that after more detailed investigation into the Vodafone migration of subscribers to Mobile it had become clear that this was not a viable option. The letter made plain that Vodafone estimated the cost of the migration at $500,000 and the time for completion at a minimum of four months. It was suggested in this letter that this was not the intent of the parties at the time that, what was described as "this option", was put forward. The letter proposed that Vodafone would prefer concentrating its efforts on continuing to implement the Vodafone channel strategy and the delivery of future growth. The letter made plain that the migration option lacked viability as it did not provide a reliable solution for the achievement of customer numbers, plus the cost to manage doubles. 5 May 2000 3/ 572 283 By letter of 5 May 2000 Mr Marchbank wrote to Vodafone in the following terms: "As you are aware, it was agreed in March that Vodafone would transfer 30,000 customers to Mobile Innovations prior to the 30th June 2000. This commitment formed the basis of our ASX disclosure that MOB would be on target for customer growth to 160,000 customers by the end of June 2000. It appears obvious that there is no clear strategy within Vodafone to effect this transfer. Several unacceptable 'smoke and mirror' solutions have been tabled, but no activity has occurred and the project once defined, is now likely not to hit the 30 June deadline. I have a duty to report this failure to the Mobile Innovations Board on Tuesday 9th May and subsequently would assume that our duty is to communicate this shortfall in our subscriber growth to the ASX, financial markets & shareholders. We have been attempting to avoid the resultant negative publicity surrounding the inability of Mobile Innovations to grow since the demise of the Network organisation, however this will become the subject of some media and financial market scrutiny if we are forced to declare our under-performance. Further it is clear that the lack of growth is driven by competitive pressure which Mobile Innovations has been unable to respond to, due to Vodafone's end of financial year constraints, and the current lack of an agreed plan going forward. If an adequate solution does exist, I would ask that Vodafone communicate the detailed project plan with timelines to Mobile Innovations so that we can assess its feasibility prior to the Board Meeting on Tuesday." [3/ 572] 284 Mr Marchbank was cross-examined in relation to this letter including a challenge to his reference to the prospectus: "Q. There was nothing that was said to you up to that time to indicate other than that Vodafone was making a real attempt to transfer the 30,000 customers to you? A. I disagree with that. There was a month when absolutely nothing got done and which is when I wrote to Mr Ogrin and asked him to make sure, I guess, to start a project, to make sure this would happen and by the time the end of April came around, the only solutions that they had put forward were smoke and mirror solutions and it was not - it is a truism to say that was the case. Q. Mr Marchbank, the proposal that the 21,000 customers, to use your words, might have been pissed off if they migrated wasn't a smoke and mirror solution, was it? A. No, but it wasn't in the best interests of either party to those particular 21,000 customers. Q. It wasn't a smoke and mirror solution, was it? A. It wasn't, no. Q. It wasn't a solution that appealed to you - I withdraw that. Why didn't you refer to that proposal when you wrote to Mr Clubb accusing Vodafone of smoke and mirror solutions? A. Well, it appeared unnecessary to take him chapter and verse through the negotiations of the past six weeks. Q. Incidentally, you go on to say it was your intention to communicate the shortfall in the subscriber growth to the ASX, financial markets and shareholders. Did you believe it was immaterial to shareholders whether you got the 30,000 subscribers as a result of your activities in the market, or as a transfer from Vodafone to bolster your numbers? A. I didn't believe that to be the case at all. I think we would have described it to our shareholders the way it was forecast to happen and the change from Vodafone to Mobile Innovations was because we make a profit managing them more so than acquiring them. Q. You say that the profit you received from Vodafone formed the basis of the ASX disclosure that Mobile would be on target for customers by March 2000. When do you recall making that commitment? A. It was in the prospectus forecast. Q. How did the prospectus - the prospectus forecast was made in May 1999; correct? A. That's correct. Q. How did Vodafone's commitment to transfer 30,000 customers in March of 2000 form the basis of a commitment in May of 1999? A. I think there were two commitments made. I think there was a commitment made by Vodafone in 1999 to grow the business by X connections per month and when the shortfall became apparent, which was around March 2000, we then made a further commitment to fill that hole with a transfer of 30,000 customers. Q. When was the commitment made by Vodafone to grow the business by a particular amount per month? A. Prior to my joining the company, I think. Q. I am sorry, I interrupted you? A. I think in about June, just prior to the beginning of the financial year. Q. I showed you earlier the prospectus at page 402, did I not? A. You did. Q. That said in terms that Vodafone had not made a commitment, didn't it? A. It said that Vodafone were able to, I guess, set targets according to the agreement. Q. And the prospectus says nothing whatsoever, I want to suggest to you, and you can read it as long as you like, to the effect Vodafone had made any commitment to grow Mobile's business in any way whatsoever? A. Well, my understanding was the way that forecast was put together was in conjunction with Vodafone's desires to grow its and Mobile Innovations business. [Transcript 334 - 335] 8 May 2000 3/ 573 285 On 8 May 2000 Mr Marchbank received a letter from Vodafone suggesting that the issue with respect to the Mobile Subscriber Shortfall had been presented to Vodafone with little or no notice. Mr Marchbank did not agree with this description. [Transcript 336] 9 May 2000 3/ 576 286 On 9 May 2000 Mr Marchbank wrote to Vodafone in the following terms: "As you know we have been working towards a plan for sometime now, trying to escape short term changes in direction, and provide consistent results. Over the last 4 to 5 months we have experienced: 1. Difficulty getting an aggressive offer for direct marketing. On the rare occasion when offers have been aggressive, they have been withdrawn for channel conflict reasons, or because of internal financial directions which do not reflect reality in the market. 2. V Mobile Offer is restricted by Vodafone and will not attract volume. 3. Inconsistent direction on CTA and Volumes. We are constantly being asked to massage numbers mid month, and serval times a quarter , based on your financial restrictions, be it pre-financial year end, or pre-float – there is always a reason resulting in confusion from yourself, Chris, Todd and Cecellia. The CTA we send you quarterly in advance as we are required to do, is never signed off. 4. No forward planning. Currently we are on version 8 of the CTA for Q2, and have no visibility for June or Q3, or beyond. 5. Lack of clarity re retention budget. 6. V Mobile funds were approved at $1.5m for the quarter and now these are being pulled back & re-allocated. 7. No vision or plan for Vodafone Direct. 8. An agreed plan to migrate 30,000 customers from the Vodafone base to MOB has not occurred and is now being obstructed by Vodafone. 9. You requested a review of the ASP Agreement and Nigel Bramwell tabled a proposal 2 months ago, which you have yet to respond to. 10. You presented us a channel strategy document in late April, which we agreed was an overdue but welcome starting point for next year. No numbers were attached to this document and in conversation with Mr Gordon Clubb it doesn't appear to be a strategy that Vodafone have a) embraced and b) budgeted for. I will be discussing these performance-related issues with our Board today and taking instructions on two key fundamentals: 1) Mobile Innovations' legal position in respect of the ASP governance outlined in our agreement, and the implied 'constructive dismissal' of our direct marketing channel, since the retail business took over its management in January last year. 2) Mobile Innovations duty to disclose its performance shortfalls and the reasons for the shortfalls to the ASX and Shareholders." [3/ 576 and 3/ 577] 287 Mr Marchbank under cross-examination on this letter gave the following evidence: "Q. Your aim was to get offers which would attract subscribers for which you could charge Vodafone regardless of whether those subscribers were profitable to Vodafone? A. That is not the case. Q. V Mobile is restricted by Vodafone and will not attract volume". V Mobile was a suggestion which only in the recent past had been adopted by Vodafone? A. Yes. Q. It was, so far as the year 2000 was concerned, a new concept in the Australian market? A. Yes. Q. It was perfectly sensible, as a matter of commerce, to approach launching such a product with care? A. I don't think we are suggesting that they shouldn't have done that. Our job was to be the direct marketing experts in the relationship and it was our job to report back where we thought they were wasting their money. Q. You deal with inconsistent direction on CTA and volumes, "we are constantly being asked to massage numbers mid month and several times a quarter based on your financial restrictions". Your complaint was, was it not, that in the months of between January and March there was no budget? A. I was alluding more to the fact that between the subsequent March and April they went from having no budget to throwing funds at us verbally: Can you do this? Can you do that? V Mobile was one such arrangement where things were thrown at us ad hoc and whilst we were appreciative of the fact that there were initiatives to help the situation it was inefficient to run an organisation in that way and I guess that's what we were trying to point out. Q. Then you refer to no vision or plan for Vodafone Direct. What you meant by that was Vodafone at that stage had not fully embraced your proposal? A. Yes. Q. They were fully entitled, you would agree with me, to consider it in light of their over all marketing strategy, both direct channel and otherwise? A. Provided they didn't come back a year later and suggest that we weren't capable of selling high end plans. Q. Then you refer to the 30000 customers and then in paragraph ten: "You presented us a channel strategy document in late April which we agreed was overdue but a welcome starting point for next year. No numbers were attached to it": And then you suggest, in a conversation with Mr Clark, "it doesn't appear to be a strategy that Vodafone embraced and budgeted for". Now where was the conversation you had with Mr Clubb concerning the channel strategy document presented by Mr Ogrin? A. I couldn't give you the exact date of the meeting. Q. What did he say? A. I actually expressed gratitude to him that we had some one like Mr Julian Ogrin to work with, who appeared to be progressive and have a lot of good ideas and I referenced the channel agreement he had shown us and said it would be great if we had numbers attached to it. He made it clear, that what Julian wanted to do with that plan wasn't necessarily what he wanted to do." [Transcript 338-339] 288 Mr Marchbank also gave the following evidence under cross-examination: "Q. Were you of the view at that time that Vodafone had, in effect, excluded you or excluded Mobile, from its marketing strategy since the retail business took over management in January? A. Yes, I was. Q. Did anything change to effect that view between 9 May and the early to mid part of June? A. I think subsequent to this period of time Vodafone's strategy changed quite significantly and they actually came to us and asked us to drive market share quite aggressively, there still remained issues in the business between retail and direct marketing." [Transcript 340] 10 May 2000 289 On 10 May 2000 Vodafone wrote to Mobile [3/ 578]. The letter stated inter alia: "After more detailed investigation into Vodafone migrating subscribers from Gemini to Mobile Innovations, it has become clear that this is not a viable option. Amdocs has estimated the cost of the migration at $500K and the time for completion at 4 months minimum. Clearly this was not the intent of the parties at the time this option was put forward. As discussed, we have considered other options which may temporarily satisfy your requirements, including the option of Vodafone leasing the customers from Mobile Innovations. However, this particular option also lacks viability as it does not provide a reliable solution for the achievement of customer numbers plus the cost to manage doubles. It is very clear that the last two quarters have been extremely competitive in "off the page" channel with the introduction of "B" Mobile and OneTel's "BYO" promotion. Thirdly Optus Direct was launched and has since intensified its activity in this channel. Therefore we would prefer to concentrate our efforts on continuing to implement the Vodafone channel strategy and delivering future growth." [3/ 578] 15/16 May 2000 290 An exchange of voice mail messages took place between Mr Bramwell and Mr Bissex on 15 and 16 May 2000. Mr Bramwell however gave evidence in relation to Mobile's assertion in its letter of 10 May that migration was not a viable option, either as to time or as to cost, that although he discussed this matter internally he did not think that he had held a discussion, between May and the time he ceased to act as chief executive, with anyone else in Vodafone about it. [Transcript 208] 291 On 15 May 2000 another bitter letter [3/ 585 - 586] was sent by Mr Marchbank covering a number of matters including: · the critical need for both parties to inter alia find a remedy for the 30,000 customers which had not been migrated to Mobile; · the need for both parties to produce a budget or plan for 12 months so that Mobile could size "our overhead to, manage our marketing spend to, and deliver connections to"; and · the assertion that what was short were clear instructions from one person within Vodafone and a review of the ASP Agreement to enable some flexibility for Mobile in the event of Vodafone not providing a competitive budget. It was suggested that unless those issues were addressed Mobile would be unable to perform efficiently in the marketplace. 292 Mr Marchbank was cross-examined in relation to this letter [Transcript 341 and following including 349-351]: "Q. If you go to your letter, you say in the third paragraph under direct marketing strategy, that although you have worked hard you have been consistently undermined by Vodafone. Do you see that? A. Yes. Q. And then in the next paragraph "for the last few months our marketing department has been employed changing plans, CDAs and schedules on a weekly basis in response to your informal directions". Do you see that? A. I do. Q. That hadn't happened certainly, had it, from 1 April up to 15 May? A. Well, it had happened. Q. - what, do you suggest it happened between 1 April and 15 May? A. Yes, I suggest that throughout the whole of the beginning of the first part of 2000 there were constant verbal changes made to business plans. Q. Can you indicate one change which was made to a business plan between 1 April and 15 May which did not relate to discussions concerning new product V Mobile? A. Well, I think probably V Mobile would be the major one that I would say was changed. I would have to check back, but there were certain changes on budgetary limitations. All of a sudden they would want to cut back on budget or increase budget. If I had time to research it I could probably provide more examples. Q. You go on, on the next page, to say that recently you provided a strategy document for Direct and Online, which certainly seemed to be a move in the right direction although no tangible numbers for connections were included in our version. No action or plan has eventuated since this document was tabled, and your management team seem to be uncommitted to it. There was nothing to suggest that Mr Ogrin was uncommitted to it? A. His boss wasn't though. * Q. You certainly did not at any stage suggest any new plans which may have assisted in giving effect to the strategy document, did you? * A. In actual fact the strategy document was borne out of the presentation we gave in January. Mr Ogrin's strategy was derived largely from Mobile Innovations and V Mobile and all of those things we discussed in January, we discussed with Julian and Julian put it into a Vodafone document. BATHURST: Q. You didn't, at the time Mr Ogrin presented the strategy, present any concrete proposal at least up to 15 May which may have assisted in giving effect to that strategy, did you? A. I guess we needed it to be approved by Vodafone before we could effect it. Q. Is this the position, did you have proposals in mind which you would bring forward once Vodafone would approve? A. Absolutely. We had been waiting to get going on these things for some time. Q. Why didn't you assist Mr Ogrin in getting approval for what those concrete proposals were? A. They were in a business plan. He just didn't have to sign off for that business plan. I used his plan, which could be a cost acquired schedule. They were in his marketing schedule document. Q. I want to clear that up with you. There may be some confusion regarding business plans in this case. What happened, in very broad terms, and I'm not asking you to commit to a particular period, or deal with any problems you say happened, in broad terms the procedure was this, wasn't it, you would be given a target? A. Correct. Q. You would know or be given the plans which were available in the quarter though, as it were, the target would be achieved? A. We generally looked at the activity and agreed which plans would be most suitable. Q. Accepting there was a consultation process? A. Yes. Q. Ultimately it was agreed to achieve the target as it were a mix of customers through particular plans? A. Correct. Q. You then, when I say you, Mobile, then prepared what would be described as a cost to acquire document? A. Correct. Q. That cost to acquire document did, and I'm putting this at a very high level generally, firstly note the number of subscribers? A. Yes. Q. Secondly, divide them up into the various mixes that we have discussed and thirdly, make estimates of what would be required, the money which would be required to achieve that, would be the end result of acquiring those? A. Yes. Q. There was then, was there not, often a negotiation process surrounding the bottom line figure in the budget and the proposed mix? A. Normally by the time we got to that stage, I mean people within Vodafone at that stage had some authority and delegative authority to agree, so there wasn't normally, once you would come to the bottom line, a discussion on the bottom line. Q. I am talking in very general terms, you understand? A. Yes. Q. With the caveat you put on it, would you agree what I put to you in broad terms outlines it? A. Yes. [342 - 343] Q. And if I could just take you, for a moment, to page 587, you repeat there that that the 30,000 customers shortfall was due to Vodafone's inability to execute a strategy in direct marketing. Then you go on to say that you needed a budget or plan for 12 months, "that we can size our overhead to and manage our marketing spend and deliver connections to". The agreement as you understood, the ASP agreement, called for quarterly business plans? A. Yes, that's correct. Q. Were you suggesting, when you wrote this letter that there should be some variation to that proposal? A. No, what I was seeking to suggest to Mr Ogrin at the time is if he gave indicative volumes we could size an organisation to we could optimise the cost to acquire in terms of the overhead component of the cost to acquire. Q. One of your complaints was, was it not, that suggested targets and other matters were varied by Vodafone from time to time? A. They were varied within the quarter in which we were actually marketing, correct. Q. If there was a 12 months plan, variations may have been necessary, if only because of changes, firstly, in competitive activity, correct? A. That's correct. Q. Secondly, changes in tariffs or plans which Vodafone was prepared to put to the market? A. Correct. Q. It could, for example, occur that a plan proved either unattractive to consumers or unprofitable to Vodafone? A. Correct. Q. And Vodafone would want to move that plan off, take that plan from the market? A. Correct. Q. Now, I want to suggest to you that in this business at the time it was quite impossible to lock in to an advertising strategy for a period of 12 months? A. I absolutely was not suggesting that a budget should be a lock in plan. However, Vodafone at the time were showing concerns about our costs to acquire and our strongest feeling was that if they had a budget or indicative plan for a period of time we could optimise our internal costs and address the issues that Vodafone had. Q. You then say in the paragraph numbered three that another thing too you wanted was a review of the ASP agreement to enable some flexibility on Mobile Innovations part in the event of Vodafone not providing a competitive budget. What were you in fact seeking there? A. Again Vodafone's major concern at the time appeared to be that this is a quote from them that they were taking all the risk and the risk was, I guess, in a cost plus environment they felt that we were running our costs too high and we were unable to - we were running our costs too high and if there was changes within the quarter we had to agree those and those took some time. The proposal interest Mr Bramwell gave Vodafone earlier in 2000 was if Vodafone had a problem with that we could put a different mechanism in place which would allay Vodafone's fears that Mobile Innovations didn't have an incentive to manage costs and enable to manage the ups and downs that happened within a quarter without having to seek their approval. Q. What did you mean by a competitive budget? A. Well, I guess when you have a marketing plan for a quarter you put a range of products in place, each of which has a budget associated with it, and the combination of those products gives you the cost to acquire value. If one of those products is not selling well and you need to sell up or sell down then it is important to have the flexibility to do so without, I guess, blowing the budget. Again, if Mobile Innovations took some of the risk in the cost to acquire formula we would have the ability to do that. Q. This was the position as it was emerging even by May of 2000, that within the budget allocated Mobile was finding it relatively easy to get customers in plans at the lower end of the spectrum? A. I disagree with that because there was very often not even a plan in place and getting customers when there is no plan in place is actually quite difficult. Q. There were tariffs in place, were there not? A. There were tariffs in place, correct. Q. And what I am suggesting to you is that the experience of Mobile up to May in 2000 or for the 2000 year up to May, was that a particular volume of advertising would produce a larger number of connections to plans at the lower end of the scale than advertising was producing connections at the higher end of the spectrum, do you agree with that? A. No, I don't agree with that. As I suggested before, we were trying to launch Vodafone Direct to actually get connections from the higher end of the scale as well. Q. See, what I want to suggest to you is because of the limited responses, even up to May of 2000 that you obtained when you sought to attract customers at the higher end the cost to acquire those customers was far more substantial than the cost to acquire customers at the lower end of the spectrum, do you agree with that? A. I don't believe we actually did much high value customer acquisition in that period so I can't comment." [Transcript 350-351] 19 May 2000 293 On 19 May 2000 Vodafone wrote to Mobile referring to the migration issue. The letter includes the following: "I emphasise the fact that my letter of 16 March 2000 was never intended to commit Vodafone to incurring significant costs or administrative time in transferring 30,000 customers to Mobile. Unfortunately Vodafone cannot agree to incur such costs or administrative time. Nevertheless Vodafone remains keen to discuss with you alternative arrangements whereby the customer transfer issue is resolved on a commercially sensible basis for both parties. In this regard I am happy to meet with you as soon as possible to discuss alternative arrangements." [3/ 591] 294 On the same day Mobile responded by letter [3/ 592] asserting inter alia: "Your assertion that you had not considered costs or administrative time is of no relevance to the central issue outlined in my letter… As stated in my previous letter, we believe that the Agreement to transfer the 30,000 subscribers by 30 June is legally binding. … A week has now passed, and issues surrounding our continuous disclosure obligations, which were then urgent, has now become critical. In addition, this company will suffer serious financial loss as a result of Vodafone's failure to honour its legal obligations. By your correspondence to us, it is clear that Vodafone has no intention to perform, or is unable to perform, its obligations under the Agreement. As such, we must give full consideration to our legal rights, including, if necessary an election to terminate the contract [Mr Bramwell under cross-examination at transcript 211 gave evidence that this was a reference to the 30,000 migration contract] and institute proceedings for damages. Mobile continues to be willing and able to perform its obligations under the Agreement." 21 May 2000 295 On 21 May 2000 Mr Ogrin had a meeting with Mr Clubb, Mr Bramwell and Mr Shaw. On his affidavit evidence the following was said: "Mr Clubb: ["This problem of migrating customers is becoming such a debacle that we're forgetting the main game, which is to work together as a partnership. What we've all been trying to do is put together bandaid solutions so you guys can achieve your goals when what we should really be doing is organically growing your channel."] [Denied by Mr Bramwell by affidavit] Mr Bramwell: "Gordon you must admit that you have been difficult to work with and Vodafone keeps changing their mind." Mr Clubb: "I know we have been difficult and I apologise. We have explored all avenues but we cannot make this migration work. It is just not financially viable to us and I doubt you guys would want to fund $500,000 for the customers. Julian has advised me that if we focus on a revised channel plan we can continue to grow your business, but with more realistic targets in this competitive environment, [somewhere between 4,000 and 6,000 connections per month. If Julian can provide you with a channel strategy that we can all agree with, can we put these issues behind us?"] [Denied by Mr Bramwell by affidavit] [Mr Shaw: "Look Gordon we're all here in this together and we should focus on making this business work." Mr Clubb: "I agree. Julian assures me that with the right tools you can be more competitive." Mr Bramwell: "I will get Jonathan to meet with Julian as soon as possible to finalise a channel plan for MI."] [Denied by Mr Bramwell by affidavit] 296 Under cross-examination Mr Bramwell gave the following evidence: "Q. Mr Clubb said during the course of that meeting: "This problem of migrating customers is becoming such a debacle we are forgetting the main game, which is to get to work together as a partnership". Do you remember Mr Clubb saying that? A. I don't recall him saying those words, no. Q. You wouldn't deny that he said them? A. I don't believe he links the 30,000 subscriber issue to the main aims of the business. I think they were two separate discussions. Q. I want to suggest he went on to say: "What we have all been trying to do is to put together bandaid solutions so your guys can achieve your goals, and what we should really be doing is organically growing your channel". A. I don't remember that. Q. You would agree with me, would you not, that the 30,000 customer migration was in one sense a bandaid solution to enable you to overcome the deficiency in the number of connections compared to your prospectus forecasts? A. What are "bandaid solutions"? Q. You have never heard the expression "bandaid solution"? A. No. I was a bit bemused by it. Q. You can take it that a bandaid solution is a solution which patches over a problem for a period rather than solves it. A. Okay. Did I view the subscriber transfer as a bandaid solution is your question? Q. Yes. A. I suppose, yes, that would be one way to describe it. Q. And you indicated to Mr Clubb that Vodafone had been difficult to work with and kept changing its mind? A. Yes, I did. Q. Mr Clubb said that he acknowledged that Vodafone had been difficult and apologised for it? A. I don't remember a specific apology but I think he did acknowledge that Vodafone had been difficult to deal with, yes. Q. He again indicated to you that the migration wasn't viable to Vodafone and it will cost $500,000? A. Yes, I remember him saying it would be difficult to achieve. Q. And he also said that he doubted that Mobile would want to fund the $500,000 to effect the migration? A. I don't remember a specific discussion about the amount of money involved. Q. The fact of the matter is that there was no way that Mobile would have been prepared to put its hand in its pocket to fund that migration, would it? A. I don't think there is any obligation on Mobile's part to do so. Q. Just as there was no obligation, I suggest to you, prior to the March agreement, on Vodafone to give you 30,000 customers? A. Prior to the March agreement? Q. Yes. A. There was no obligation prior to the agreement, no. Q. You wanted a present from Vodafone but when it became difficult you were going to insist on the legal rights you claimed to have. That was your position, wasn't it?… Q. Mr Shaw then said that it was important to focus on making the business work? A. Indeed, one of the points of the meeting was to focus on future strategy, yes. Q. And you suggested that Mr Marchbank should get together with Mr Ogrin to finalise a channel plan for Mobile? A. Yes. [Transcript 211 - 213] 297 Under cross-examination it was put to Mr Bramwell that thereafter Mobile determined not to hold Vodafone to the migration agreement. He did not accept this proposition. His evidence in this regard is accepted as reliable. Nor did he accept that if Mobile continued to assert that the agreement was in place and one in respect of which it could sue for damages, it was necessary or appropriate to disclose this to the market. [Transcript 214 - 215] 298 Mr Bramwell also gave evidence under cross-examination which is accepted as reliable, that the board of Mobile resolved to wait to see how discussions developed in relation to the migration issue, it being apparent that they did not commence proceedings on this issue at that time. [Transcript 218] 299 Mr Clubb was not called by Vodafone 25 May 2000-Channel strategy presentation 3/ 598A [see q] 300 A meeting took place on 25 May 2000. Mr Ogrin's evidence was as follows [ XX 48]: "110. On 25 May 2000 I met with Mr Marchbank, Ms Statham and Mr Stonell at MI's offices in which I presented my channel strategy which then contained a forecast of the number of customers to be acquired by MI for the rest of Vodafone's financial year, that is to March 2001. Located at pages 51-69 of JIO1 is a copy of the finalised channel strategy. 111. In the course of the meeting the following discussion took place: Mr Ogrin: "We need to revise the forecasts for the remainder of the financial year from 8,000 to approximately 4,000 to 6,000 connections. What I would like us to do is to develop a budget for next quarter which tests various channels as opposed to just allocating the whole budget to OTP." Mr Marchbank: "What I would like to achieve today is to identify the various channels and allocate some connection targets for the next quarter." Mr Ogrin: "I would like to see us address more focus on affinity. I have spoken to Cecelia and she has arranged a meeting with the Commonwealth Bank. Claire are there any other partners we can focus on?" Mr Statham: "We've had good success with Double Day, Fly Buys and the NRMA. There are also some customer lists that we can buy. I will track these down." Mr Marchbank: "No Bull have had some success with TV advertising and I met with a group that will do door to door selling on our behalf. We should add these to the test." 301 Mr Marchbank gave evidence as follows: "On 25 May 2000 I met with Mr Ogrin at Chatswood to discuss initiating a 12-month plan to provide both Mobile Innovations and Vodafone with a platform for further growth and to prevent the circumstances that had led to the subscriber shortfall and the resultant ACM Agreement from occurring again. During this meeting I said: "Mr Marchbank: "If the numbers we have discussed come true it will be a great start and fix all of the issues we have had in the past 6 months. But be aware that the Board has not yet made a decision on whether we go ahead and take legal action regarding the ACM Agreement. The jury is out on what we do next. This just provides us with what we should have had 6 months ago." 302 Under cross-examination Mr Marchbank gave the following evidence: "Q. I want to suggest to you that in showing you that chart Mr Ogrin said, "We need to revise the forecast for the remainder of the year from 8000 to approximately 4000 to approximately 6000 connections. Do you remember him saying that? A. I remember him suggesting that it should be around 40000 connections. Q. He talked in terms of the financial year, did he not? A. He did. Q. The chart I am showing you shows projections for the financial year? A. I'm sorry, I can't say I saw the chart when I don't recall that I did. Q. You recall, Mr Marchbank, that the Vodafone financial year ended on 31 March on any given year? A. Yes, I do recall. Q. And this customer forecast, whether or not you saw it, goes out until the end of the then current Vodafone financial year? A. I see that. Q. And I want to suggest to you that what Mr Ogrin said was firstly that forecast needed to be revised from 8000 to 4000 to 6000 connections. Do you agree with that? A. I agree that he said that 6000 was a more realistic run rate than 8000, which was the one we were previously planning to at that rate. Q. He indicated a range of 4000 to 6000? A. I don't remember him saying 4000 to 6000, I remember him saying to 6000. Q. We want to budget for the next quarter which tests various channels rather than allocating the whole budget to OTP? A. I remember him saying that, yes. Q. Can you explain to his Honour what OTP is? A. Off the page. We weren't at that time spending all of our funds on off the page advertising, we had a fairly even split. I guess there was a view Vodafone had that we were putting too much into advertising, but I agree we had that conversation. Q. What you said was what you would like to achieve today is to identify the various channels and allocate some connection targets for the next quarter? A. Correct. For the balance of the year because at the time we didn't have these figures so we were asking him to allocate us some targets over the course of the financial year. Q. I want to suggest to you that you were more concerned at that particular point of time to ensure that you had your targets for the next quarter, although you were concerned to have them out for 12 months as well, is that correct? A. That's correct. Q. Your primary aim at that stage was to achieve, to get connection targets for the next quarter? A. Yes. Q. That's what you told Mr Ogrin? A. Yes. Q. And Mr Ogrin said, did he not, during the course of the meeting, that he would like to see Vodafone and Mobile address more focus on affinity? A. He said that, yes. Q. And that a meeting had been arranged with the Commonwealth Bank? A. He said that, yes. Q. He asked Ms Statham, who was present at the meeting, whether there were any other partners who could be focused on? A. That's correct. Q. Ms Statham said that Mobile had good success with double day fly buys and the NRMA and there were some other customer lists that could be bought? A. Yes. Q. You said that a company with the unfortunate name of No Bull had had some success with TV advertising. Do you remember saying that? A. I remember words to that effect. Q. You met with a group that were door to door selling on the parties' behalf? A. I think I suggested we test door to door selling, correct. Q. Would you agree with me that that meeting was a meeting which was productive and explored in a sensible commercial fashion a way to go forward? A. Yes, I do. Q. And in that context you received - and that was a cordial meeting, do you agree with that? A. I do. Q. You certainly didn't threaten to sue Mobile during the course of that meeting, did you? A. To sue Vodafone? Q. To sue Vodafone? A. I am not in the habit of threatening to sue people in meetings like that. Q. You didn't indicate anything to the effect that the board of Mobile were considering suing Vodafone over the 30,000 subscriber issue, did you? A. It would be inappropriate to do so to someone at that level in the organisation. Q. It would be quite wrong to discuss that issue with Mr Marchbank, wouldn't it? A. Mr Ogrin. Q. Can I try that again: It would be quite wrong to discuss that issue with-- A. Yes, it would be. Q. I wonder if you would mind going for a moment to paragraph 21 of your affidavit. You see you there refer to the meeting of 25 May? A. Yes. Q. And you say that you said that if the numbers that were discussed come true "it will be a great start and fix all the issues we have had in the past 12 months". Now, there was certainly, in that meeting, was there not, a discussion about numbers? A. Yes, there was and there was a discussion about numbers, correct. Q. And it was in that context, I suggest, the customer forecast was shown to you. Do you agree with that? A. No, I don't. I can't agree I actually saw the customer forecast. Q. Then you say you went on to say, "But be aware that the board has not yet made a decision on whether we go ahead and take legal action regarding the ACM agreement". Reconsidering that, would you agree with me that you did not say that during the course of the meeting? A. No, I said that at the end of the meeting, I think. Q. You just said to me a few moments ago that it would have been inappropriate to discuss that matter with Mr Ogrin? A. I don't believe referring to it was discussing it. Q. Is that a serious answer? A. I have to put in context our commercial relationship with our legal relationship. At the time it was strained. It was inappropriate not to refer to it. Q. A moment ago you said it was inappropriate? A. I said it was inappropriate to discuss it, I didn't say it was inappropriate to refer to it." [Transcript 353 - 355] 303 Mr Marchbank's evidence is accepted as reliable. 304 Neither Ms Statham nor Mr Stonell gave affidavit evidence on this meeting. 25 May 2000 Letter Mobile to Vodafone [3/ 596] 305 A letter from Mr Marchbank of 25 May 2000 detailed a number of matters which required to be addressed before a positive announcement to shareholders could be made by Mobile. Attached was a spreadsheet which summarised the plan which should be budgeted for within Vodafone. The letter set out a strategy for obtaining 9,000 connections per month at a CTA of $540 using a combination of off-the-page, e-commerce, TV, member-get-member and affinity programs (3/596-8). The cross-examination is to be found at Transcript 356 and following. Significantly and as Mobile points out: · there is no mention of any agreement terminating the ACM agreement; and · Mr Ogrin said he would have instituted these initiatives anyway (Mr Ogrin Tr 1028/11-17; 1029/1-17). 27 May 2000 306 An e-mail of 27 May 2000 sent by Mr Wisbey of Vodafone [3/ 565A] included, in relation to the migration of customer issue, the following: "We're working on the basis that we must do what has been promised to Mobile ". [emphasis added] 307 A further document [3/ 565B] makes very plain the perceived problems for Vodafone in completing the migration and the fact that completion of the migration would not result in net gains for Vodafone. This document includes the words: "Obviously option 2 would make the most commercial sense to alleviate our obligations which we confirmed in writing to Nigel previously and supply Vodafone net growth in an extremely cost-effective manner. By combining the offers above, Mobile weighted CTA would improve dramatically supplying Vodafone the most useful way to meet our obligations to Mobile and reciprocate Mobile's obligations to Vodafone". [emphasis added] 2 June 2000 308 Mr Ogrin responded to Mr Marchbank's letter of 25 May stating that a more realistic forecast for off-the-page was 6,000 per month which would be supplemented with a CBA affinity program for 60,000 connections (6,667 per month) [3/601-4]. 7 June 2000 309 A letter 3/ 604A Vodafone to Mobile contained a 9 month forecast from July 2000 to March 2001 which had reduced the off-the-page forecast to 49,000 (5,444 per month) and the affinity forecast to 18,000 (2,000 per month) (3/604A-B) 310 On 7 June 2000 Vodafone wrote to Mr Marchbank making various proposals which were suggested as aiming to ensure growth and operational stability for both organisations. 8 June 2000 – Notification to the marketplace 311 Ultimately by notification to the marketplace of 8 June 2000 Mobile stated as follows: "The Board of Mobile today announced that its subscriber numbers would fall short of prospectus forecasts by 20 percent for the year ending 30 June 2000. Mobile had previously stated it was confident in meeting subscriber numbers of 160,000 for the June year-end based on an agreement with Vodafone that would have resulted in Mobile acquiring an additional 30,000 Vodafone customers. It is now highly unlikely that those customers will be acquired by 30 June 2000. Mobile's subscriber base at 30 June 2000 is now expected to be 130,000." Mobile Innovations' Chairman Will Jephcott said the outcome was disappointing. Significantly increased marketing spend by competitors and the impact of prepaid mobile phones have made it extremely difficult to achieve the forecast growth in subscriber numbers. Mobile Innovations has an exclusive 10-year Agent Service Provider agreement with Vodafone under which it provides subscribers to Vodafone from non-electronic direct marketing sources. Mobile Innovations' marketing budget and strategy is set in conjunction with Vodafone and discussions are continuing to develop plans to compete more successfully in the current market place. The roll out of both V Mobile and Vodafone Direct is expected to provide major stimulus to new subscriber growth. Both of these products were launched too late in this financial year to have a significant impact on the 30 June 2000 subscriber numbers. Mobile Innovations achieves the majority of its margin from managing as opposed to acquiring subscribers. As a consequence, despite the shortfall in new subscriber numbers, Mobile Innovations is cash-flow positive and expects an EBITDA (earnings before interest, tax, depreciation and amortisation) of $6 million (approximately 5.5 cents per share) for the year ended 30 June 2000. The Board of Mobile Innovations has decided to write-off the net acquisition costs of G3 subscriber base it purchased in September 1999. The amount of approximately seven hundred thousand dollars will be expensed as an abnormal item in the year-end accounts. The company intends to continue to offer long distance services to its mobile subscriber base as part of its resale agreement with Cable and Wireless Optus." [3/ 604D] 312 Cross-examined in relation to the announcement, Mr Bramwell agreed with the proposition that management, as distinct from the acquisition part of the business, was the more profitable. [Transcript 187] However in answer to the proposition put to him that profitability did not exist to the same extent in relation to high cost plans as distinct from low cost plans, Mr Bramwell said that this depended on whether they were billed quarterly or monthly. He accepted that if they were billed monthly, the profitability on higher call plans for management was slightly eroded. [Transcript 188] 313 Mr Marchbank accepted under cross-examination that there was no meeting at which he was present from 25 May 2000 up to March 2001 where there was any suggestion that Mobile was continuing to press a claim on the 30,000 subscribers. [Transcript 363] The MI board gave consideration to whether to bring proceedings, but resolved to wait and see how discussions with Vodafone developed (Mr Bramwell Tr 218/24-37). Mr Marchbank told Mr Ogrin so (Mr Ogrin Tr 1030/24-53). 26 June 2000 3/606A 314 Ms Statham was cross-examined on a creative brief by Mobile to prepare advertising material for Vodafone Direct. [3/ 606A] The brief states that "Vodafone Direct launched in May 2000". Under cross-examination Ms Statham gave evidence clarifying this statement: "Q. And you see it states under background, Vodafone Direct launched in May 2000. That was the position, was it not? A. Yes, it is terminology used quite loosely to advise our advertising agency that Vodafone Direct - we can use Vodafone Direct, the logo, but we weren't, it wasn't a launch as such. A true launch is where a lot of funding is put behind a brand and you make the marketplace aware that it is going to happen and it is about creating awareness of a brand. You don't just put a logo on an ad and run it. We did put logos on ads and ran them because Vodafone wanted us to. [Transcript 539 – 540] Early July 2000 315 Vodafone altered its marketing strategy to "accelerate the business" and strive to become number two in the market (Mr Ogrin 22/11/02 para 120). 316 In conjunction with that change in strategy Vodafone launched its "My Choice" plans, which included free minutes to a level equivalent to the monthly access fee (eg a $17 plan entitled the customer to 17 free minutes) (Ms Blake 4/12/02 para 133-4; Mr Ogrin 22/11/02 para 125). 317 Both Mr Clubb and Mr Ogrin communicated the change in Vodafone strategy to Mr Marchbank in early July 2000 (Mr Marchbank 22/5/02 para 56; Mr Ogrin 22/11/02 para 120). Mr Clubb was not called to give evidence. July 2000 - MC 9 Plan 318 An early issue arising during this period of time concerns the MC 9 plan already outlined. The alleged oral agreement is one whereunder Mobile says it was asked to devise a marketing set of plans to enable Vodafone to expand its customer base dramatically. The agreement is said to have been entered into in July. 10 July 2000 4/607 319 On 10 July 2000 (4/607), Mr Marchbank sent Mr Ogrin a letter relating to changes in the operation of the website and noting the inappropriateness of the long form agreement. [Mr Marchbank 22/5/02 para 30] 11 July 2000 320 Letter Mobile to Vodafone [3/ 607A] 19 July meeting Ex xx page 53 321 Mr Marchbank gave evidence as follows: "57. Ms Statham, Ms Kenny and I attended various meetings with Mr Ogrin and Mr Wisbey to develop a new plan to meet Vodafone's requirements. On 19 July 2000 Ms Statham and I attended a meeting with Mr Ogrin and Mr Wisbey at which the details of a new $9 plan, to be marketed from August, were discussed …for submission to Vodafone's tariff committee. During the meeting we had a conversation: Mr Ogrin: "Vodafone want to aggressively pursue market share." Mr Marchbank: "The $9 call plan would attract market share. However customers on this plan are likely to call up frequently to find out how many free minutes they have left. That will increase our costs. Therefore we must ensure that we get paid monthly and we get $7.00 per month for CTM because they'll be expensive to manage." Mr Wisbey: "We do not care about CTM at this point in time. Mr Ogrin: "We want you to increase your spending to get the growth. We will give you an extra $1.2 million." 322 Under cross-examination Mr Wisbey gave the following evidence: "Q. Do you recall him saying that in those circumstances they wanted to ensure that they got paid monthly and they got the seven dollars CTM because of the expense involved in managing it? A. Yes. Q. Do you recall responding to Mr Marchbank that at that time Vodafone didn't care about the CTM? A. Yes, I do, on-" [Transcript 1073] 323 Mr Ogrin gave evidence under cross-examination that he did not recall Mr Wisbey making that statement. [Transcript 1033] Also that he was not present at any discussion concerning CTM in mid to late July 2000. He accepted however that Mr Marchbank had asked for the $7.00 fee. [Transcript 1033 – 1035] 324 Mr Marchbank's evidence is accepted as reliable. July 2000 - December 2000 Late July – Proceedings commence 325 The proceedings commenced in late July 2000. 20 July 2000 3/ 608 326 Mr Marchbank wrote to Mr Ogrin confirming the tariff elements. [3/608-9] It included the My Choice components (Ogrin 22/11/02 para 124-5): "3 A new tariff of $9 per month….is to be approved by Vodafone for [Mobile] offers from August onwards." 21 July 2000 327 Email from Mr Wisbey to Mr Marchbank [3/ 609A] 21 July 2000 3/609O Mr Wisbey submitted the tariff parameters for the proposed new plan to Mr Matrone (General Manager Commercial), the Vodafone officer responsible for approving tariffs on 21 July (Mr Ogrin 22/11/02 para 127; 3/609O). 27 July 2000 328 Email 4/ 615A 329 Email 3/ 610 Email 3/ 611 330 An email of 27 July 2000 was sent from Ms Statham to Mr Wisbey, a copy of which went to Mr Marchbank. In this email, Ms Statham stated that: "Effective from August 1, Vodafone will no longer pay CTM for Non tolling V Mobile customers on either V Mobile tariff." [3/ 611] 331 In reply to this email Mr Marchbank stated: "Each new marketing initiative (V Mobile/Vodafone Direct/SIM Only) has had attached to it some 'sting' re. our contract and the CTM charges or CTA overhead or CTA margin. I'm fed up negotiating by email every week deal by deal." [3/ 611] 332 Mr Marchbank then continued: "If you want to review the ASP contract and propose an alternative model, please do so. " [3/ 611] 333 Under cross-examination Mr Marchbank acknowledged the content of the e-mails. He gave the following evidence: "Q … Your position in this, as taken in this e-mail, was you are entitled to the V Mobile management fee on non-tolling customers on the basis that the ASP contract entitled you to it, correct? A. Correct. [Transcript 380] Q. You didn't rely on any oral agreement made between you and Mr Day or you and Mr Ogrin or anybody else? A. That's correct. Q. That's because there never was any oral agreement in relation to fees payable in respect of V Mobile, was there? A. Not that I can remember. [Transcript 380] 27 July 2000 MC9 Plan 334 By 27 July 2000 the new tariff for the MC9 plan had been approved by Vodafone (Ogrin 22/11/02 para 131; 4/617A-L). The plan included 200 free minutes of off peak call time to a fixed line or PSTN (Marchbank 22/5/02 para 59; 4/617A, 4/617O; Moussa 6/12/02 para 34). 28 July 2000 335 Further fax, further email from Mr Wisbey to Mr Marchbank in relation to the V Mobile issue. [Transcript 381] 336 Mr Marchbank gave affidavit evidence as follows: "60. I had a conversation with Mr Ogrin and Mr Wisbey on 28 July 2000: Mr Marchbank: "Given that you are filling us up with low value customers, which have some new and more complex tariffs, I hope you are not expecting us to bill these customers quarterly or pay Mobile Innovations only the 'low value' CTM (ie $5.00)" Mr Ogrin: "Why should we pay you the full whack ($7) for these customers?" Mr Marchbank: "The issues involved in offering 'my choice' options to any customers, especially low-end customers who have never had a mobile before, are huge. They ring up every day and want to know how many minutes they have left, and when they get their bill they call up furious because they don't understand how we allocate the discounts. If you want to drive this for volumes we would end up doing double the CTM work for half the money." Mr Ogrin: "Listen, I don't have a problem as I know what you are saying is true. Our target is connections, so whatever you need to do to get the numbers is fine by me." Mr Marchbank: "We will charge you $7 to bill these customers monthly." 337 Mr Ogrin gave evidence by affidavit that he could not recall such a conversation on 28 July. He did recall Mr Marchbank raising in a July telephone conversation, his concerns about management issues. 338 Mr Ogrin gave the following evidence under cross-examination: "Q. And if I suggest to you that you said to Mr Marchbank that you didn't have a problem as you understood what he was saying, namely that people call up and phone up and asking about their bill because they don't understand how it works and you said "I know that's true but our target is connections, so whatever you need to do you get the numbers and that's fine by me"? A. I deny saying that." [Transcript 1034] 339 Mr Marchbank's evidence is accepted as reliable. 340 Mr Wisbey gave evidence under cross-examination as follows: "Q. Do you remember Mr Ogrin responding, "We want you to increase your spending to get the growth, we will give you an extra 1.2 million"? A. Words to that effect, yes. Q. Do you remember subsequently meeting with Mr Ogrin and Mr Marchbank in July at a time at which Mr Marchbank said that Vodafone was filling them up with low value customers which have some new and more complex tariffs and was hoping that Vodafone weren't expecting them to bill them quarterly or pay the low value CTM? A. I didn't recall that specific conversation but had known of Mr Marchbank's views on the CTM and the nine dollar plan. Q. Do you recall Mr Marchbank - Mr Ogrin asking why Vodafone should pay the "full whack"? A. I don't recall that. Q. Do you recall Mr Marchbank asserting that he was going to charge the seven dollars to bill the nine dollar customers monthly? A. Not from that particular conversation but it was my understanding that that's what they were going to do." [Transcript 1074] 8 August 2000 341 Mr Marchbank gave evidence as follows: "46. On 8 August 2000 I gave a presentation ( TB618 - 630 ) to Mr Edwards, amongst others, at Vodafone's office in Chatswood during which I said, when speaking about the CTM for V Mobile: Mr Marchbank: "We cannot accept a $0 CTM for any class of customers. The only saving is the non-printing of a bill, but we would still expect them to call from time to time. We propose a $4 CTM for non tolling customers on the V Mobile plan." 61. I gave a presentation ( TB618 - 630 ) to Mr Edwards, Mr Ogrin and others on 8 August 2000 at Vodafone's offices in Chatswood. During that part of the presentation that related to the $9 plan there was a conversation: Mr Edwards: "Why should we pay you $7 a month for these customers?" Mr Marchbank: "They require considerably more monthly management than a standard tariff. These are complex tariffs and if we are taking the credit risk we need to communicate the up to date call invoice to a customer when he requires it which will be frequent. Messrs Ogrin/Edwards: "We agree." [Denied by Mr Ogrin by affidavit] [However in cross-examination Mr Ogrin accepted that he did not remember this] [Mr Edwards was not called] [see below] 342 Mr Marchbank was cross-examined in detail about the presentation. [Transcript 381] Particular reference was made to 4/ 621, 4/ 624 and 4/ 625. [Transcript 382] 343 When asked in cross-examination about the conversation and the comment made by Mr Marchbank in response to the question about why Mobile should receive $7 a month for customers on the $9 plan, Mr Ogrin gave the following evidence: "A. I recall the nature of the discussion on 8 August to be focussed around his proposal to reduce CTA and increase CTM from $7 to $9. I don't recall any discussion on $9 plans. Q. Does that mean you just don't recall it; it could have happened but you just don't remember? A. That would be correct, yes." [Transcript 1034] 344 Mr Edwards was not called to give evidence. 345 Mr Marchbank's evidence is accepted as reliable. 346 The final slide in the presentation was as follows: "Options for MI and VPL moving forward are: 1. Agree an amendment based on these changes to the remuneration model, to be reviewed in 12 months. 2. Continue to operate as now, with existing model for reimbursement…which is hard for all to work with. 3. Wait for MI initiatives to be implemented and pass the benefits on, under existing terms. 4. Look for a total change in MI's & VPL's relationship...AL & GC have indicated ASP is not a long-term model…MI would need VPL to propose this. 5. A combination of 1) and 4)." [4/ 630] 347 Under cross-examination Mr Marchbank gave evidence as follows: "Q. If you could go to page 630, would it be fair to say that it was certainly your view at that particular point of time that something needed to be done to make the contractual relationship between the parties more workable? A. Yes." [Transcript 383] 348 Under cross-examination Mr Marchbank was taken to paragraph 61 of his affidavit (which has been extracted above). He gave the following evidence under cross-examination: "Q. What I want to suggest to you is this: that at that meeting Mr Edwards indicated to you that after your presentation - that Mr Edwards indicated to you after your presentation that Vodafone needed to do its own business case on your proposal and you indicated that wouldn't cause a problem? A. That was on the amendments to the ASP agreement, yes. Q. I want to suggest to you that in fact at that time Mr Edwards had not committed Vodafone to paying you the seven dollar management fee on the nine dollar plan, and that that was one the matters in respect of which it was necessary for Vodafone to do their own business case. Do you agree with that? A. No, I don't ." [Transcript 383] 349 Further evidence was given under cross-examination about the fee payable in respect of V Mobile. [Transcript 383-4] 15 August 2000 – ASP Amending Agreement [PX 8/ 1330AB] 350 On 15 August 2000, an agreement amending the ASP was entered into pursuant to which Mobile began acquiring customers through a dealer channel defined in the amending agreement. 28 August 2000 351 On 28 August MI connected a further $9 plan to its billing system, the "MI Plan 9 3 months free" plan which offered free access for the first 3 months after the customer had connected (see MFI6; Ms Moussa 6/12/02 para 35). Quarter ending December 2000 – CTA Worksheet with target of 27,900 352 The CTA Worksheet for the quarter ending December 2000 involved a target of 27,900 [of which 17,450 were Mi Mailer]. [9/ 1375] 4 October 2000 353 A letter to Mr Ogrin from Mr Marchbank canvassed the following issues, in an attempt to clarify the position of the parties [4/ 635]: · Customer management fees; · Customer acquisition; · The disconnection of non-tolling customers under the Vodafone Direct brands who had previously been rolled onto the $0 access plan; and · Non-tolling V Mobile customers. 354 Mr Marchbank was cross-examined on this letter, with particular focus being given to the disconnection of non-tolling customers and the V Mobile issue. [Transcript 384-5] The following paragraphs of the 4 October letter were dealt with in cross-examination: "Customer's previously rolled onto the $0 access plan rather than disconnect, who aren't tolling – do not attract a management fee. We have stopped using this plan and the existing 3,500 non-tolling customers will be disconnected between now and December. " [4/ 635] "Non-tolling customers who do not make a call for a six month period will be disconnected, when Vodafone can give MI the ability to monitor inbound performance of these accounts." [4/ 636] 5 October 2000 355 Mr Marchbank gave evidence of having had a conversation on 5 October 2000 with Mr Ogrin and Mr Wisbey where Mr Marchbank asked whether his facsimile had been received. After some further discussion on his evidence, Mr Ogrin said that the facsimile was "fine". Mr Ogrin denied in his affidavit having said that the facsimile was fine. On his affidavit he simply said that he would get back to Mr Marchbank. 356 Mr Wisbey did not give evidence in relation to this conversation. 357 Mr Marchbank's evidence is accepted as reliable. 17 October 2000 358 A letter [4/ 639A] was sent from Mr Ogrin to Mr Marchbank in response to Mr Marchbank's letter of 4 October. In cross-examination Mr Marchbank gave evidence that he never received a copy of this letter. [Transcript 385] 1 November 2000 359 On 1 November Vodafone introduced, and MI connected, a further $9 plan to its billing system, the "MI Plan 9 400 mins" plan, which increased the number of free minutes from 200 to 400 (Mr Marchbank 22/5/02 para 64; see MFI6; Ms Moussa 6/12/02 para 64). 3 November 2000 360 An email was sent from Mr Marchbank to Mr Ogrin attaching an analysis relating to the development of direct marketing channels. [4/ 655H; 4/ 655I] 6 November 2000 361 Email from Ms Moussa to Mr Parsons about the CTM clawback. [4/ 649] 362 Under cross-examination Mr Marchbank gave evidence as follows: "Q. Did you give Mr Parsons an instruction to telephone Ms Moussa from Vodafone to indicate that if the ARPU for the nine dollar plan was above $30 Mobile should get the higher CTM for those customers? A. No, I don't recall doing that. Q. Do you deny doing that? A. No, I don't recall doing that." 363 Around this time Mr Stonell complained to both Ms Moussa and Mr Mitchell that Vodafone had clawed back on the MC9 plans (Mr Stonell 25/6/02 para 42). Mr Mitchell suggested the higher CTA depended on MC9 customers having an ARPU of at least $30 (also 4/653). Mr Stonell responded that the higher CTA was independent of ARPU (Mr Stonell 25/6/02 para 44). 364 Ms Moussa then purported to remove the CTM clawback (TB653) although, in fact, she did not do so and consequently the lower CTM was paid for October (Ms Moussa 6/12/02 para 63). November 2000 365 Mr Marchbank was present at a meeting in November 2000 at which Mr Stormon gave a presentation. Mr Bramwell was aware that a little earlier Vodafone had carried out an operational audit of Mobile. The presentation is to be found at 4/ 644B et seq. Mr Bramwell recalled pointing out to Mr Stormon a matter relating to direct marketing as a discipline and how it relies on continuity and planning and forethought to deliver cost-effective results. He recalls pointing to some of Vodafone's inefficiencies in the period, the lack of the correct tools to sell which caused the higher cost to acquire than other channels. [Transcript 222] 366 Mr Marchbank confirmed in cross-examination that he was in attendance at the meeting and confirmed that the presentation at 4/ 644B to 4/ 644U was the presentation given by Mr Stormon. [Transcript 393]. Mr Marchbank was cross-examined on various graphs contained in the presentation, which compared the position of Mobile to the position of two other service providers. [Transcript 393-8] November 2000 367 A Vodafone: Mobile ASP Review was conducted in about November 2000. [4/ 655V-4/ 655Z]. The review covered customer management and customer acquisition. 15 November 2000 368 On 15 November 2000 Vodafone notified Mobile of the target for the March 2001 quarter as 24,000 (4/656). 27 November 2000 369 On approximately 27 November 2000 Mr Marchbank 's evidence was that he contacted Mr Stormon at Vodafone and had a conversation: "Mr Marchbank: "I still have not received confirmation that Vodafone will pay the $7.00 CTM on the $9.00 plan. We've already reversed one clawback. This was the basis upon which MI went forward. Can you please get us that confirmation?" Mr Stormon: "I don't see any issue. You'll get a letter. We've just been waiting for the results from the audit to come through." 370 In cross-examination Mr Marchbank gave evidence: "Q. I want to suggest to you that the conversation which took place on that day between you and Mr Stormon referred to costs generally and did not specifically relate to the nine dollar plan. Would you agree with that? A. No, I don't." [Transcript 398] 371 [4/ 657-4/ 659] – emails between Mr Marchbank and Mr Stonell about the increased CTM. Mr Stormon was unable to confirm the CTA/CTM rate by the close of business on 29 November 2000. 30 November 2000 – BAM/CTA review 372 30 November is the date when Vodafone completed its first review of the BAM and CTA now fixing as the new rates: BAM (i) $43.17-per connection up to 8000 customers (ii) $21.58-per connection thereafter CTA (I) $7.67-for monthly billed customers (ii) $5.67-for monthly billed customers on lower access plans (iii) $5.00-for quarterly billed customers (iv) $nil-for non-tolling V. Mobile customers 373 Under cross-examination Mr Marchbank gave the following evidence: "Q. Mr Mitchell dealt with V Mobile customers and indicated that: Vodafone currently pay Mobile the full cost to manage all customers under management. This includes those V Mobile customers connected to the network who are not tolling. Then Mr Mitchell went on to say: Vodafone reserved its right to assess the CTM for non-tolling V Mobile customers post September due to the unknown quality of these customers, in respect of their spend and value to Vodafone. As Vodafone derives no direct revenue from non-tolling V Mobile customers and Mobile Innovations do not generate invoices Vodafone would not pay a CTM for non-tolling V Mobile customers. That decision was, was it not, in accordance with the arrangements you understood had been reached concerning V Mobile customers? A. No, I disagree. Q. Do you say that Vodafone had agreed at any time to pay the full rate on V Mobile customers? A. No. But I didn't believe there was an opportunity for them to charge, to reward us with a zero value for those V Mobile customers under the agreement. I didn't see where that fitted into it." [Transcript 399-400] Mobile's summary of the ASP and of Vodafone position 374 In November 2000 a detailed document was produced by Mr Marchbank summarising a number of relevant matters concerning the then ASP and arrangements with Vodafone. [4/ 655V] 375 As Mr Marchbank accepted that the conclusion which had been drawn was that: "Both Vodafone and Mobile recognise that at more than 8000 connects per month, volumes is achieved and the economics of Mobile became valuable and not draining to Vodafone". [Transcript 388; 4/ 655V] Management Fee – reduced to nil for some subscribers 376 Critically 30 November 2000 is the date when Vodafone notified Mobile that the management fee was reduced to $0 for subscribers not making calls. [4/ 660] 1 December 2000 377 On 1 December Mr Stonell raised with Mr Mitchell the absence of any explicit mention of the CTM fee for $9 plans in the 30 November letter and sought confirmation that the higher CTM rate ($7.67) would be paid. Mr Mitchell said that Vodafone would pay the higher CTM since "the current spend is about $29 or $30" (Mr Stonell 25/6/02 para 46). Mr Stonell's evidence is accepted as reliable. [cf transcript 627] 378 Mr Mitchell was not called to give evidence, however he confirmed that position in an email on 5 December but added the caveat that "this CTM will be subject to review to ensure that the MC9 spend remains at acceptable levels" (4/ 668). 7 December 2000 ASP Meeting - (minutes of the meeting are at 4/ 669) 379 Mr Marchbank gave affidavit evidence as follows: "50. At the ASP meeting on 7 December 2000 ( TB669-670 ) there was a conversation: Mr Marchbank: "Vodafone has stated in the audit letter that it will not pay CTM for non tolling V Mobile customers. We believe CTM should be paid." Mr McDonald: "We simply cannot justify paying you anything if the customers do not spend money." Messrs Jones/Marchbank: " It is arguable whether the same customers do not toll every month. Quite often customers may not toll one month but make calls the following month. In addition, customers who do not make phone calls in any one-month may still be receiving incoming calls from which Vodafone receives interconnection revenue. It is unreasonable for Vodafone to pay nothing when the customers may be active." Mr McDonald: "We can do some analysis to see whether the customers are receiving incoming calls." Mr Marchbank: "I would be interested to see that and then make a decision but in the meantime it does not make any sense for us to acquire customers if we don't receive a CTM fee. Even if they are not receiving calls from other parties, they are still customers who have an expectation of service. We will pass on to Vodafone the only saving we perceive which is the non-production of a bill. If Mobile Innovations aren't getting a CTM, we would have to disconnect them." Mr McDonald: "We'll do the analysis and take it from there." 80. On 7 December 2000, I attended an ASP meeting ( TB669 - 670 ) during which I had the following conversation: Mr Marchbank: "Are we still on for a continuation of the sales volume for the next quarter?" Messrs Wisbey/Stormon: "We can't guarantee we will be reaching the peak we have reached previously but we are planning 8,000 per month for the next few quarters." Mr Marchbank: "Is there nothing on the horizon that would stop this next quarter given it's your end of the financial year and you always slow down?" Messrs Wisbey/Stormon: "This year its different. We're still chasing market share." Mr Marchbank: "Is it possible we will continue to do the same type of numbers we are doing now, between ten and twelve thousand?" Messrs Wisbey/Stormon: "We can't guarantee that. It is safer planning to 8,000." 380 Under cross-examination Mr Marchbank gave the following evidence: "Q. Does that remain your best recollection of what was said at the ASP meeting on 7 December on this topic, that is the V Mobile topic? A. It does…. Q. Whatever was otherwise said, would you agree with the proposition that nothing was said during the course of that meeting by you or to your recollection by anyone else from Mobile to the effect that V Mobile's management fees in respect of non-tolling customers were to be paid in accordance with clause 20.1 of the ASP agreement? A. What was said at that meeting was that V Mobile non-tolling customers officially should fall under a standard cost to manage clause because there was no provision for non-tolling. However, as a concession we would be happy to pass on our savings for non-tolling customers on V Mobile to Vodafone." [Transcript 406-7] 12 December 2000 4/ 679 381 Vodafone notified MI that connection targets for the March 2001 quarter were to be reduced "by at least 25%" (Marchbank 22/5/02 para 81). Formal notification was given the next day - the drop was to 19,105 (January – 5,500; February – 6,560 and March – 7,045) (4/679). 14 December 2000 4/ 679 382 Mr Marchbank told by Mr Stonell in an email that Vodafone were effecting downward cost adjustment on all channels for the quarter ending 30 March 2001. After 17 December 2000 383 By a few days after 17 December Vodafone had adjusted the payments for October and November so that MI received the higher CTA (now $7.67) for MC9 customers for those months (Ms Moussa 6/12/02 para 76). Vodafone continued to pay the higher CTM for MC9 customers for December 2000 and January 2001 (Ms Moussa 6/12/02 para 79, 81, 86; 5/690I). 20 - 22 December 2000 [5/ 697 - 5/ 698] 384 Email discussions between the parties about the planned targets for the first quarter in 2001. At this stage there seemed to be disagreement about the planned targets. More specifically whether the planned target would be 8000 or 6000-7000 per month. [Transcript 411] 22 December 2001 385 On Friday, 22 December 2000 [697] Mr Clubb - copies to Mr Stormon and Mr Wisbey - congratulated MI on their performance for the last three quarters. [698] Mr Stormon said Mobile had done a great job. January 2001 - June 2001 386 On 2 January 2001 Mr Marchbank wrote to Mr Clubb [5/ 703] (copies to Messrs Stormon, Wisbey and Ogrin) pointing out the positive things that had happened and stating that unit costs could be reduced and volumes increased and "putting the ball in Paul's court." [10 January 2001] 387 Mr Stormon responded [709A] on 10 January 2001 stating that, "There needs to be a change in the structure of the arrangements between us. I am putting some effort into developing the analysis we need to get the support your end and mine to make them come to fruition (once we work out what they are). Let me summarise the various identified measures which will deliver a level of benefit to both organizations simultaneously." [The so called "measures" that Mr Stormon had in mind are set out at 708B and Mr Marchbank responded on 19th February. [708A]] 11 January 2001 388 [6/ 709] – email from Mr Marchbank to Mr Stormon entitled CTA/Retention budget. 389 [6/ 709A] – challenge in an email made by Mr Marchbank to an email from Mr Stormon dated 10 January 2001. 12 January 2001 - Target for June quarter of 23,000 mentioned 390 6/ 710 – email from Mr Stormon to Mr Stonell and Mr Marchbank. Mr Stormon states in the email: "we are working on volumes of 7,000, 8,000, and 8,000 for April, May & June respectively." 391 I accept that on the evidence, at the same time Mr Stormon was trying to "massage" the numbers for the March quarter [712] suggesting that payment of CTA for the March quarter be split to improve the balance sheet numbers for the financial year ending 31 March 2001. He said he was acting on instructions from Mr Clubb. 15 January 2001 392 On 15 January 2001 [713] Mr Stonell confirmed to Mr Stormon that Vodafone wanted 23,000 connections (7,000; 8,000 and 8,000) for the June quarter. 19 January 2001 393 On 19 January 2001 [716] Ms Fleur McDonald (with copies to Ms Blake and Mr Stormon) put the proposal in effect to massage the figures. 394 At 718 (copy to Ms Blake) Mr Stormon only wanted 19,000 to "see the light of day" and was still talking about 23,000 in volume for the June quarter. 24 January 2001 395 Meeting on 24 January between Vodafone and Mobile where Mobile agreed with the proposal for joint setting the March and June targets. (Mr Marchbank 22/5/02 para 85) 25 January 2001 – ASP meeting took place. 396 The minutes of the meeting [6/ 720-6/ 722] indicate that issues of growth were addressed. Including the following: "VPL to confirm 12 month CTA targets to be provided to MI with an approximate monthly target of 8,000 connections. 12 month business model to be provided by both VPL and MI" [6/ 721] 397 Also on 26 January 2001 Ms Blake spoke of needing "to look radically at how we do things differently - we need some massive budget improvement..." [722BA] 398 Her handwritten notes transcribed of a sales overheads budget review is at 722CC. There they talk of "take share out of MI" then "focus on bringing down CTM" and making them profitable. 399 The note also records that Mr Clubb feels that we should focus more on CTM/ARPU. 31 January 2001-24,000 connections for June quarter 400 On 31 January [726] Webb confirmed the estimated weighted CTA for the June quarter was 19,000 connections. His letter also referred to an additional 5,000 connections for that quarter. 31 January 2001 6/ 726A-726B 401 Letter from Mr Shearman of Mobile to Mr Stormon about the requirement of an invoice for the hosting and communications costs of the website. [6/726A-726B] 402 Mr Marchbank gave evidence that Mr Stormon responded to this by advising that everyone at Vodafone who had anything to do with the e-commerce platform had left the company and Vodafone had new plans in relation to the platform which did not involve Mobile Innovations. [Marchbank 22/5/02 para 32] 1 February 2001 403 On 1 February 2001 - a meeting took place between Mr Ogrin, Mr Stormon and Mr Marchbank. 404 Mr Marchbank was cross-examined on what happened at the meeting, giving the following evidence: "Q. What do you recall being said at that meeting? A. Well, I remember Mr Ogrin telling me that Vodafone had decided they wanted to get out of the ASP agreement, look for alternatives and, as we had previously discussed, which we had, there was some scope for Mobile Innovations to be used as a segment manager for their low value customers when it came to customer management and that there was an opportunity, an imminent opportunity, to transfer 3 or $400,000, certainly a six figure number of customers, into Mobile Innovations in lieu of making any new connections; would we be interested. Q. I want to suggest to you that Mr Ogrin didn't say that Vodafone didn't like the ASP agreement but what he said was that Vodafone's parents had indicated shifting focus from customer acquisition to customer management; you disagree with that? A. I do. Q. He also told you, in terms, that Vodafone was going to severely slow down its growth? A. I don't recall him saying that. Q. He also said to you that Vodafone United Kingdom has identified the market is maturing which means that the cost structure of the business needs to be reshaped? A. I would deny that. Q. Then he said to you, I suggest, that there was an idea of turning Mobile into a customer management bureau where it would manage all Vodafone customers who spend less than $40 per month? A. That was the nature of the discussion, yes. Q. He said that including your own it would be up to 600,000 customers. Remember him saying that? A. That's correct. Q. He said it would be necessary to get access to Gemini and to revise the ASP agreement? A. Correct." 405 Mr Marchbank's evidence in this regard is accepted as reliable. [cf Mr Ogrin's affidavit of 22 November, paragraph 166] 1 February 2001 6/729 406 On 1 February Ms McDonald formal confirmed the estimated weighted CTA for the June quarter was 19,000 connections. [6/729] 1 February 2001 - Numbers massaging email 407 The numbers "massaging" continued via an email dated 1 February 2001 from Ms McDonald to Mr Marchbank (copies to Mr Stormon, Mr Wisbey and Ms Blake, amongst others) (TB 729). 408 Mr Marchbank sought confirmation of the arrangement for the June quarter on 1 February 2001. [729] 409 An internal email from Ms Blake to Mr Moore [Mobiles customer representative] [733A] copied to Mr Ogrin on which Ms Blake was cross-examined was in the following terms: "We are setting up a small group of people to work on how we make Mobile Innovations profitable, this will be a separate group than the other one!! It will consist of: · Julian Ogrin (Sales – strategy) · Paul Storman (Sales) · Fleur McDonald (Finance) · ?? Possibly legal & commercial at a later stage!! · ?? A billing representative – possibly when we have a preferred way forward The idea is (something like): · We will stop MI connecting their current volumes & significantly reduce the Cost to Acquire we pay them · We will drastically reduce the Cost to Manage we pay MI – partly by significantly reducing the service the customers receive, and partly by increasing the volume of customers that MI manage (also by technology driven savings!!) · MI manage all Vodafone's suitable low value customers – eg <$30 spend – (not sure if this has to be credit card only) · Give these customers a cut down service, charge for all extras, quarterly billing or online billing should be compulsory etc We would like to have this operational by Sept, I have very conservatively estimated savings next fin year as $10M. The group will develop a project plan to implement this (or an alternative way forward), also work on the longer term way forward with MI, eg a possible migration plan to Gemini, for all their customers, if this doesn't happen immediately as part of the above plan. Julian has discussed the idea in principal with MI, and they are prepared to discuss it further, once we have agreed on our preferred approach. We would like a nomination from CS – my thoughts would be Brad? We need someone that understands the MI relationship, but more importantly the possible technology and volume driven savings that can be achieved. Also the implications from a customer management and billing point of view, eg do we need to migrate to Gemini immediately? What do you think?" [Emphasis added] 410 At about the same time Vodafone requested that connections to V Mobile be stopped, [742] and also withdrew the Vodafone $5 plan from the range. On or about 13 February 2001 Mr Wisbey said to Marchbank, "Vodafone is pulling V Mobile". [Mr Marchbank 22/5/02 para 54] 411 On 1 February 2001 [732] Mr Stormon suggested to Mr Marchbank (copy to Mr Ogrin) that the next step is for "us to propose something to you. The potential measures we discussed will be useful in exploring customer service cost reductions and I would welcome any additions to that list. We still have a way to go but there is potential for a huge win/win." 8 February 2001 412 On and from 8 February 2001 Vodafone refused to pay $7.67 monthly for MC9 subscriptions and only paid $5.67 per month. 15 February 2001 413 By 15 February Mr Stormon had not yet had a meeting with a view to strategy review "(If we still need one)" [6/ 743] and said, "Let me divulge that reducing costs to manage across the breath of our lowest spending customer base is a serious hot button. In advance of a formal approach from us do you wish us to consider a hypothetical?" 414 Significantly and almost at the same time, Vodafone sought to claw back "cost to manage the MC9 plans". [6/ 740, 745] 16 February 2001 415 In an email from Mr Stonell to Ms Moussa of Vodafone dated 16 February 2001, Mr Stonell stated that Mobile always expected to earn $7.67 on the $9 plan. [6/ 745] (See also the cross-examination of Mr Marchbank. [Transcript page 418 – 419]) 19 February 2001 416 On 19 February 2001 [6/ 747] Mr Marchbank referred to "Your intent... for MI to 'tear up' the current ASP Agreement..." and to the fact that Mr Stormon no longer wished the meeting to go ahead. 417 Vodafone then sought to withdraw the June quarter figures. [760/ 762] 418 At the same time came the Horne/Smith budget review on 20 February 2001 [763C] and critically the budget action plan [763I] which refers to "contractual exposure". [Ms Blake Tr 825 /45 - 53; 857 /14 – 17] 419 The evidence included the following note of a teleconference call within Vodafone: "Budget Review Conference Call Minutes 20 February 2001 This teleconference meeting was called by Julian Horn-Smith (JHS) to provide guidelines to the OpCos on their forthcoming detailed budget submissions, in light of initial indications of EBITDA growth for fiscal year 2002 which fall significantly short of the Group's expectations. The main cause of this shortfall is the gradual decline in ARPU, especially voice ARPU which results from a combination of the economic slowdown (a similar pattern was observed in the 1988-89 slowdown) and the increasing number of connected SIMs which do not generate any traffic. However, the ARPU estimates are accepted. While an increase in data traffic partly offsets this trend, the outline EBITDA growth in the 13 – 14% range is insufficient. JHS pointed out if the Q3 FY 2001 ARPU were achieved in the same period in FY 2002, it would show an improvement of Euro 2 billion. Therefore we are coming to the conclusion that a fundamental change is taking place in the wireless market and we need to modify our behaviour accordingly. In northern Europe, for example, handset subsidies of Euro 1 billion have been paid but the actual return on these new sales is not sufficient to maintain investments on a financially viable basis. With high levels of penetration and the arrival of new UMTS entrants in the market in two years or so, the current levels of subsidy are no longer sustainable. Indeed, it will also be difficult for our competitors, with highly geared balance sheets, to continue paying current levels of subsidy. Therefore, the financial model used heretofore can no longer be assumed and a new model, based on new assumptions, needs to be used, even if there is a risk of a sizeable reduction in market share. Remedial Actions Required In view of the foregoing, JHS requested the following changes be made in the detailed budget submissions for FY 2002: 1) No change in ARPU assumptions (except in the Netherlands where the projected ARPU growth in excess of 30% does not seem realistic. 2) Prepaid top-up commissions should be reduced to between 6 – 8% within 6 months from now (i.e. no later than 3 months into the new fiscal year). Preparations to do this need to begin now, given it may require more than one step. 3) Handset subsidies on prepaid connections should be reduced to zero within 6 months from now. 4) On postpaid a significant reduction in connection bonuses should be introduced: connection commissions need to be reduced by at least 30% within the first 6 months of the new fiscal year (August 1); with the exception of specific actions to retain the most valuable customers. The reduction should probably follow in either two steps of 15% each or three stages of 10% each within 6 months. Notwithstanding this, the absolute maximum for a postpaid handset subsidy should be Euro 100 within 6 months, but again this does not apply to the most valuable accounts which we will, of course, strive vigorously to keep." [6/ 763c] 20 February 2001 420 Marketing meeting where there was a discussion about outstanding costs in relation to the website. [Mr Marchbank 22/5/02 paras 33-4; 6/759] 21 February 2001 6/753 On 21 February Ms McDonald confirmed the March quarter target as 19,000. 23 February 2001 421 Communications between Vodafone and Mobile continued to clarify the target. [6/760; 6/762] 27 February 2001 Draft CTA business plan for June quarter 422 On 27 February Ms Statham gave the first draft CTA business plan for the June quarter to Vodafone. It was prepared using the target of 23,000. [6/764-5] 28 February 2001 423 There was a meeting with various members of Mobile and Vodafone where Mr Brown of Vodafone indicated to Mobile that it could only promise 12,000 connections for the year. [Transcript 419] The competing evidence was as follows: "AFFIDAVIT OF MR MARCHBANK SWORN 22 MAY 2002 89. On 28 February 2001 I attended a meeting at MI's office with Mr Brown, Mr Stormon & Mr Ogrin. During this meeting I had the following conversation: Mr Brown: "We are sorry to have to inform you that we have decided from the first month of our next financial year, which begins in April, we can no longer acquire customers through your channel because we have orders to reduce all of our acquisition particularly in the consumer market. Unfortunately Mobile Innovations is sitting right in the middle of that cutback and therefore we can only promise you 1,000 connections a month for the next twelve months. Mr Marchbank: "That's completely contrary to your legal obligations. Mr Brown: "We are aware of our legal obligations. We are looking at alternatives to the ASP Agreement in order to provide you with some compensation and we have set up a meeting next week with David Moore, Vodafone's Customer Service Director, who has a proposition for Mobile Innovations to become a customer management partner of Vodafone." Mr Marchbank: 'We are extremely concerned with Vodafone's approach. We should continue to acquire customers until such time both parties have agreed an alternative model which we had been attempting to do for some time." Mr Brown: "There is a high degree of urgency inside Vodafone. I am not in a position to be able to consult with you. It is something that I am actually going to put into effect straight away." AFFIDAVIT OF MR STORMON SWORN 9 DECEMBER 2002 102. I refer to paragraph 89 of Mr Marchbank's affidavit. I recall that Ms Statham and Mr Stonell also attended that meeting. 103. I deny that Mr Brown said: Mr Brown: "Unfortunately Mobile Innovations is sitting right in the middle of that cutback and therefore we can only promise you 1,000 connections a month for the next twelve months." 104. I say Mr Brown said: [Mr Brown: "Unfortunately Mobile Innovations is sitting right in the middle of that cutback and therefore we can only promise you 12,000 connections for the next twelve months."] [Mr Marchbank denied this conversation] AFFIDAVIT OF MR MARCHBANK SWORN 14 FEBRUARY 2003 5. I refer to Mr Stormon's affidavit and respond as follows: (g) As to paragraph 103: (i) I refer to paragraph 89 of the First Affidavit. Mr Brown said the words attributed to him in paragraph 89 of the First Affidavit. (ii) We then had the following conversation: Mr Marchbank: "But we already have a target of 12,000 commencing for the coming quarter. Does that mean that we should expect 0 from thereafter for the remainder of the year. Mr Brown: "I'm not going to be led on that question. Mr Marchbank: "But you must agree that is the implied meaning of what you're saying." Mr Brown said: "Effectively yes." I then responded and the conversation continued as set out in paragraph 89 of my First Affidavit." 424 In the result it does not seem to me that Mr Stormon takes any relevant issue with Mr Marchbank's account of this meeting. He testified that Mr Brown was designated to give MI the bad news. In any event Mr Marchbank's account is accepted as the more probable and as reliable. 425 Importantly, Mr Brown, on the Court's finding of fact, said expressly "I am not in a position to be able to consult with you. It is something I am actually going to put into effect straight away." 426 Mr Brown was not called as a witness. 427 On 28 February 2001 Mr Marchbank wrote to Vodafone detailing the happenings at the meeting. [See particularly paras 1 - 3 of the letter] [6/ 767] 428 Mr Marchbank recorded what he had been told as follows: "1. VPL has informed MI that it is now driving for customer value only, and does not seek to grow its customer base with customers who are likely to spend less than $35 per month. 2. VPL considers that MI's business drives grow in this segment. Therefore VPL would like to reduce customers acquired via MI, unless those customers can be expected to have an ARPU of $35 or higher, and can become NPV positive within 12 months of acquisition. 3. As a result of (2) above, VPL informed MI that they are expecting no more than 12,000 new connections next financial year from MI, over a 12 month period. These customers are likely to come from Affinity programs conducted on Vodafone's behalf. VPL indicated that they were open to ideas from MI regarding any new initiatives that could be undertaken. MI suggested that VPL alone were in a position to define this, as previous opportunities had not been embraced by VPL. 4. In order to provide an alternate source of revenue to MI, VPL will consult with MI and offer MI a new opportunity to manage a portion of VPL's customer base. The quantity of customers discussed was uncertain but the range quoted by VPL was 150K-400K existing VPL subscribers. Any specifics of this 'new opportunity' are not yet defined, and VPL's David Moore will contact MI within one week to begin this process. MI need to know the value of this proposed 'contract', the remuneration structure and operating principles, including which billing system is to be used and whether remittance customers are to be included. 5. MI pointed out that VPL had initiated significant changes to the March quarter's CTA within the quarter, as a result of VPL's ongoing need to reduce costs and connections. Vodafone had previously agreed to rollover into the June quarter any connections (to a maximum of 5k) over and above 19,000. As of 28 February VPL has indicated that this is no longer their position. It remains uncertain what will occur after the point 19,000 connections are reached. 6. MI have presented to VPL a new CTA for the June quarter, which you personally indicated verbally that VPL did not accept. The connection volumes within this CTA were agreed previously with Paul Stormon and Fleur McDonald from VPL. If VPL's position has since changed then MI need to understand VPL's new position immediately, otherwise MI will need to default to the CTA from the last quarter which has been agreed. This would be the December quarter. Commitments are already in place for April and May 01. 7. March and June quarter's CTA activity were originally confirmed in writing by VPL's Denys Webb, Finance Director, dated 31 January 2001. When financial re-imbursement arrangements were subsequently changed, it was verbally indicated by Fleur McDonald that volume levels for both levels remained unchanged." [6/767] 429 By early March 2001 Ms Statham had become aware that Vodafone were looking for higher value customers in contrast to the volumes they were seeking in the previous year. [Transcript 553] 7 March 2001 – target of 12000 subscribers for 12 month period 430 On 7 March 2001 Vodafone [by letter signed by Mr Brown as Executive General Manager, Consumer Sales but prepared by Mr Stormon] set a target of 12,000 new connections for the next twelve-month period from 1 April 2001 up to 31 March 2002. [6/ 775]. The letter involved a radical reduction of the target set for the quarter ended June 2001 [from 23,000 per quarter to 12,000 per year (see 6/ 729)] This is the letter in respect of which Mobile submits that a process commenced whereby Vodafone wished to bring an end to the ASP agreement which is said to have ultimately, noted with the nil targets. 431 This letter of 7 March also confirmed that Vodafone had set a target of 19,000 for the March 2001 quarter. This target was revised down from the initial target set by Mr Webb on 31 January of 23,000 (Transcript 443). 432 The letter was in the following terms: "With regard to your letter of 28 February 2001 summarising the issues we confirm as follows: 1-2 Vodafone agrees. 3. We confirm the target of 12,000 new connections for the period 1 April 2001 to 3 March 2002. As you appreciate, this is consistent with Vodafone's right to set target connections under the ASP Agreement. 4. We confirm Vodafone is exploring all new opportunities which are for discussion purposes only. This was commenced with the meeting today including David Moore to further discuss these opportunities. 5. Vodafone reiterates that the agreed connections for March 2001 quarter is 19,000 new connections. Any overspend in actual acquisitions cost will be treated in accordance with the ASP Agreement. 6-7 With regard to the June 2001 quarter we can confirm the letters dated 31 January 2001 from Denys Webb were superseded by Fleur McDonald's emails on 20 February 2001 and 23 February 2001. Estimated CTA for June 2001 quarter We advise the forecast connections for June 2001 quarter is 12,000 new connections. Consistent with our future directions we intend to go to market with offers based around Vodafone branded plans of $33 and above. We request a revised estimated CTA based on the above." [Letter from Mr Peter Brown of Vodafone to Mr Marchbank of Mobile Innovations dated 7 March 2001] 433 I accept as of substance the plaintiffs submission which is that this letter is of critical significance for at least the following reasons: (a) it unilaterally set a yearly target for the financial year April 2001 to March 2002; (b) it imposed that target without any discussion; (c) it envisaged the entire target for the year being reached in the first quarter, effectively setting a nil target for the nine months from July 2001 to March 2002; (d) it marked the start of Vodafone's repudiatory conduct culminating in the subsequent unilateral nil target determinations. 434 Also on 7 March 2001 a meeting took place between Mr Tales, Mr Stonell and Mr Marchbank. Mr Marchbank gave evidence that during the meeting Mr Moore gave a presentation (TB776 - 783) and that the following conversation occurred (see affidavit of Mr Marchbank at para 93): Mr Moore: "We intend to turn Mobile Innovations into a call handling centre for Vodafone. We will control the billing system and CRM (customer relationship management) infrastructure. You can manage many more customers and we can channel calls to you. It's a new business replacing the outdated ASP model. Mr Marchbank: "We are interesting in exploring alternatives but this is not attractive. There are better companies to do this work than Mobile Innovations and it's a 'sweat shop' approach. We are a DM company and can add value in many more ways like upgrading customers, member-get-member etc." Mr Moore: "We can and will do that internally. We don't need you to do that. Mr Marchbank: "What happens to all our IT infrastructure and billing systems? Mr Moore: "You should de-commission it and get Gemini." Mr Moorebank: "But you have previously told us that's a huge job and will cost millions " Mr Moore: "Well now we have some motivation and could switch you over in weeks if we wanted to." Mr Marchbank: "Its amazing what you can do when Vodafone want something, unlike when you reneged on the ACM agreement. What choice do we have if we don't want to become a call handling centre, but continue with our agreement as is?" Mr Moore: "This is our strategy and its early days but we will work through the detail." Mr Marchbank: "We would need to understand the remuneration structure and whether this proposal replaces the revenues you appear to be forcibly removing from us." Ms Blake: "Don't worry we will work all of this out. Mr Marchbank: "I'm sorry but I have heard nothing that gives me any confidence and, unless you have any hard proposals and financials for us to consider, I insist you pursue your obligations under the ASP agreement." Mr Bissex: "I really am sorry about the current situation. We have just discovered some huge holes in our budget and the UK is making us take some radical steps to cut costs." Mr Marchbank: "Yes Andrew, but you can't ignore your legal obligations" Mr Bissex: "We need time and we can't commit to anything today." 435 Mr Marchbank was cross-examined about this conversation. (Transcript 446-7) In particular he was questioned on his understanding of the right of Vodafone to set targets. 436 He gave the following evidence in cross-examination: "Q. You believed, did you not, that Vodafone had the right to set targets under the agreement? A. In consultation with Mobile. Q. And your belief was that if there was a disagreement between Vodafone and Mobile, Vodafone were entitled to set the target? A. No, I believed that we could at least follow a dispute resolution procedure to try and seek agreement first. Q. You were made aware, fairly shortly after this time, that Vodafone's position was that it had the unilateral right to set targets? A. Could you repeat the question, please? Q. You were made aware shortly after this time, March 2001, that Vodafone asserted that it had the unilateral right to set targets? A. Yes." [Transcript 447] 437 Mr Moore's presentation [779] communicated Vodafone's intention to negotiate new service agreements. Mr Moore was not called. Mr Bissex was at the meeting (he also was not called). He referred to a $70 million hole in Vodafone's budget. Mr Clubb also referred to it on 9 March 2001. [Mr Marchbank 25/5/02 para 96]. Curiously, Mr Maher said he knew nothing of it (Tr 804/1-30). He became chief executive in July 2001 effective 1 September 2001. 438 Mr Ogrin was at the presentation meeting. He takes no issue with Mr Marchbank's account. [Mr Ogrin 22/11/02 paras 194 ff] Chief Executive Officer's Report February/March 2001 written by Mr Marchbank soon after 7 March 2001 [6/ 921D] 439 Soon after 7 March 2001 Mr Marchbank wrote this report which is an important report. It was in the following terms: " CEO' Report – February/March 2001 Summary Both months have been slow sales months due to the unexpected but usual slow down in Vodafone's sales at the end of their financial year. The customer base at the end of March will sit slightly over 180,000 for MI, nearly 11,000 in NZ, and 4700 for Look Mobile. Year end figures had been expected at 195,000 for MI and 10,000 for Look. NZ may get to 15,000. New Zealand The slow down in NZ has been due to reduced MI activity due to weaker offers from Telecom resulting in weaker/more expensive sales. In addition TNZ are declining on grounds of credit worthiness at least 40% of our sales referrals. This is having a negative impact on sales, with 700-900 total new connections per month over Jan-March, which is 40% down on plan. The situation in NZ is expected to improve, we are now quite advanced in our contract negotiations with Telecom NZ, and hope to have an agreement/JV in place by mid April. The business plan for this JV will be tabled at the next Board meeting on 10 April, as will the final contracts for approval. Vodafone In Vodafone, the situation in the March quarter which is usually turbulent, was expected to be reversed in the June quarter, as volumes and retention budgets had been agreed to in February, and we had taken this information to our investors in the form of a year-end projection. The 'new connection' agreement came in writing from Vodafone's finance director, Denys Webb who has since left Vodafone Australia. As soon as he left it appears Vodafone tried to reverse his agreements. On 28 February, during MI's analyst presentations, Vodafone arranged a quick meeting to tell us that they no longer wanted to use MI as an acquisition channel. They quantified this by informing us that they had only 1 k new subscribers per month in their budget from 1 April onwards, for MI. Indeed they wanted to stop in March, when sales reached a certain point. Vodafone's rationale for such a dramatic change is that the UK has directed them to focus solely on EBIT to the detriment of subscriber growth and on acquiring customers with a net value of $35 and above. IN addition those new subscribers must become NPV positive within 12 months. Clearly MI's customer acquisition to date has been focussed on customers who take longer to pay back and have on average, a lower spend. Vodafone informed MI during the meeting on 28 February, that they were keen to discuss alternative business models. To this end they invited us to a meeting on 7 March with David Moore, their director of customer service. David informed us of their strategy for customer management which was to take back the customer bases from SP's over time, and bill and manage these centrally, giving a 'uniform look and feel' to all Vodafone customers. The role for an SP after the integration of its customer base back to Vodafone, was to be a 'call handling' facility. The 'new business' Vodafone talked about in our meeting on 28 Feb, was in actual fact to become a call handling facility, where calls inbound to Vodafone were directed to MI by an IVR, or a predictive dialler. MI would be paid on volumes of calls taken, which would be agreed quarterly. As David himself mentioned, these facilities can easily become 'sweat shops'. At the same meeting, David informed us that the billing system MI use (Selcom) could be integrated into their own (Gemini) within 45-90 days. This had been a scenario when MI had been promised Vodafone customers a year ago, was too expensive and took over a year! It is clear Vodafone now have a strategy with MI and are ready to 'integrate'. In summary we have two major issues which have led us to dispute. 1) We had an agreement with their Finance Director and Finance Manager for June quarter volumes, which we took to the market. We need Vodafone to honour that agreement. They have given us an indication they want only to do 12k, not the 23k previously agreed new connections. This would give us an NPAT shortfall for up to $500k for the year. 2) It is clear that beyond the June quarter Vodafone do not wish to entertain the ASP Agreement in its current form. The letter dated 7 March 01 from Peter Brown states clearly the following contentious points: · "The target of 12,000 new connections from 1 April 2001 until 31 March 20002" (Minimum levels in the ASP contract are 48,000 pa) · "We advise the forecast connections for June 2001 quarter is 12,000 new connections" (This infers that the Volumes from July 01 to March 02 will be zero, as the whole year has only 12,000 new connects allocated as above). · "We confirm Vodafone is exploring all new opportunities which are for discussion purposes only." (The fact these are for 'discussion purposes' means there is no trade-off for MI to assess) 440 In this regard Mr Marchbank's cross-examination [Transcript 440-443] included the following: "Q. Can I show you a copy - it is not in the bundle - of a document entitled "Chief Executive Officer's Report, February/March 2001", which I can tell you was produced by Mobile's instructing solicitors on discovery. Do you remember providing this report? A. Yes, it looks familiar. Q. You refer to New Zealand, which I won't trouble you about, and then you refer to the year end projections. What I wanted to direct your attention to was this: in the last paragraph you say, the first page: "Vodafone's rationale for dramatic change is that the United Kingdom is to direct them to focus solely on earnings before interest and tax to the detriment of subscriber growth and on acquiring customers with the net value of $35 and above. In addition these new subscribers must become net present value positive within 12 months. Clearly Mobile's customer acquisition to date has been focussed on the customers who take longer to pay back and have on average a lower spend". That is an accurate summary of what Mobile's customer acquisition has been focused on, isn't it? A. It is. Q. Then you refer to the fact that Vodafone indicated they were keen to discuss alternative business models. Do you see that? You refer to a meeting of 7 March with Mr Moore and in effect indicated to the board that you weren't very keen on the alternative. A. Well, yes, that's correct. It wasn't my recommendation at the time but it was a serious proposal. Q. You refer to the fact that Vodafone had given you an indication that they only want to do 12,000 not 23,000 previously new connections. "This will give us a net profit after tax shortfall for up to 500,000 for the year". Do you see that? A. I do see that. Q. Your profit, of course, was entirely dependant on the number of connections, wasn't it? A. No. In the short term it was. This was a report written in March. I had three months left of the financial year which we had already forecast to the ASX based on the commitments of the Vodafone's finance director. What Vodafone was suggesting was that they were reversing out of those commitments and the result would be a shortfall in base acquisition margin in that three month period of time. Q. It was made clear to you, wasn't it, from early February that for the succeeding financial year Vodafone would only want 12,000 connections? A. Absolutely not, early March. Q. I suggest to you that Mr Ogrin told you that in early February. Do you agree with that? A. I don't agree with that. Q. Even if it was early March, you had no doubt in your mind that that was what Vodafone wanted for the next year? A. They put it in writing, yes. Q. You had no expectation that after the March quarter, the first quarter of the year, the number of the connections would increase, did you? A. No. Q. You were in a position then where you - at that time your view was that there were no proposals you could put to Vodafone which would convince them to change their mind? A. Say that again please? Q. You were given an opportunity to discuss alternative business models with Vodafone, weren't you? A. They asked us to put forward any ideas that we had. Q. You didn't have any ideas to put forward, did you? A. No, we discussed, there were two or three or four ideas already on the table. Q. All of which either had proved unsatisfactory or had been rejected by Vodafone before? A. All of which had been ignored by Vodafone. Q. And all those, in some way, involved giving further support to Mobile in circumstances where Mobile through its own business was enabled to attract high value subscribers? A. Not correct. Q. Mobile Innovations was a marketer, wasn't it? A. Was a marketer? Q. Yes. A. We were a direct marketing specialist company, yes. Q. And the agreement that it had with Vodafone required it to use its best endeavours to market Vodafone's product? A. Correct. Q. And Mobile could only do that in the low value end of the market unless Vodafone adjusted its business in some way to assist Mobile to get more high value subscribers? A. I disagree. Q. You wanted Vodafone Direct, didn't you? A. Amongst other vehicles, that would have achieved both of our goals, yes. Q. You wanted different tariff plans, didn't you? A. We have to compete in the market place, Mr Bathurst. Q. You go on to say the target of 12,000 new connections from April the 1st 2001 to 2002 - you say, "minimum levels in the ASP are 38,000 per annum". You are referring there to base acquisition margin? A. Yes, I was. Q. You knew, did you not, that there was no guarantee in the agreement, apart from the base acquisition margin? A. My understanding was that if you can combine the base acquisition term and the benchmarks in the agreement, that was the minimum we needed to achieve static growth." 441 A particularly important part of this cross-examination involves the following evidence which I accept as reliable: "Q. You go on to say "the forecast connections is 12,000 new connections for June". That infers from July to March it will be zero as the whole year has only 12,000 new connections allocated. You appreciated from that time on, didn't you, that if there were 12,000 achieved in June, unless there was a radical difference in the mix of customers, that would be all that Vodafone acquired in the year? A. We were told emphatically that regardless of the mix of customers, there would only be 12,000 for the year and they were already allocated. Q. I want to suggest to you that you weren't told you that. You were rather told that Vodafone was not prepared to agree to any more than 12,000 unless they could be expected to have an ARPU of $35 or higher or become net positive within 12 months of the date of acquisition. Is that correct? A. My understanding of it was that the 12,000 had to actually fall into a category, not 12,000 plus any more that have to fall into a category. Q. You thought you had to have 12,000 $35 or net positive, value positive after 12 months? A. That was my understanding. Q. You never set about seeking to achieve that? A. Yes, we set about straight away trying to achieve. We had a forecast for 23,000 for the coming quarter which we tried to adapt." 9 March 2001 6/ 790 442 On 9 March 2001 a meeting took place between Mr Clubb and Mr Ogrin. Mr Marchbank's evidence was that the following conversation occurred: Mr Marchbank: "You cannot do what you are trying to do under the terms of the ASP agreement." Mr Clubb: "We have a hole in our books of major proportions which is all down to some very questionable management and accounting. It's all coming home to roost now and we have to do radical things that are being driven by the UK. You must give us time to resolve these issues and then address what is possible for Mobile Innovations." Mr Marchbank: "We are and remain open to renegotiate the ASP as long as it's a win-win, but I have no level of confidence that you will be able to do this. Ever since I have been here, which is only a year or so it has been a shambles. I cannot go back to my Board and tell them that I have faith Vodafone will quickly support us in this scenario as they remember all too well the unfulfilled ACM agreement. We will be following a legal path at the same time as trying to resolve things commercially." Mr Clubb: "I understand. If you want my opinion you should lobby Brian Clark quite hard as he is the decision maker at this stage. I am not sure Andrew will be around too much longer." 443 Under cross-examination Mr Marchbank gave the following evidence: "Q. You said that ever since you have been at Mobile the relationship between Vodafone and Mobile has been a shambles? A. No, I didn't say that. Q. Do you deny that you said, "Ever since I have been here, which is only a year or so, it has been a shambles"? A. Which I was referring to the way the ASP agreement had been operated and not the relationship between Mobile and Vodafone…. "Q. You made it clear that you would be following a legal path at the same time as trying to resolve things commercially? A. I said I felt I had to, given the situation that Vodafone were putting us in. Q. Your words were, "We will be following a legal path at the same time as trying to resolve things commercially"? A. That's correct." [Transcript 450] 444 On 9 March Deacons wrote to Vodafone [6/ 790]. The letter was in the following terms: "MOBILE INNOVATIONS We act for Mobile Innovations Limited ("MI "). Our client has provided us with a copy of recent correspondence passing between it and Vodafone relevant to Vodafone's obligations under the Agent Service Provider Agreement dated 2 October 1998 (" ASP Agreement ") and the Additional Customer Management Agreement dated 20 March 2000 (ACM Agreement"), which correspondence indicates that Vodafone has either breached or is considering breaching these agreements. We deal with each agreement in turn below. 1. Vodafone's Obligations under the ASP Agreement 1.1 Pursuant to clauses 17.2 and 17.4 of the ASP Agreement, Vodafone and MI are required to agree the estimated acquisition costs and volumes in respect of any quarter at the commencement of the month prior to the commencement of that quarter. Failing this, the estimated acquisition costs and volumes for the previous quarter is deemed to be the estimated acquisition costs and volumes for the relevant quarter. 1.2 Despite the fact that it had previously been agreed that the number of new subscribers for the quarter ending 31 March 2001 would be 24,000, our client's managing director, Jonathan Marchbank agreed with Denys Webb, Vodafone's Finance Director, to accommodate a change requested by Vodafone. Accordingly, on 31 January 2001, as evidenced by a letter of that date [a copy of which is attached] it was agreed that the number of new subscribers for the quarter ending 31 March 2001 would be 19,000, with our client having the right to connect a further 5,000 new subscribers. 1.3 As regards the June 2001 quarter, it was agreed that the number of new subscribers would be 23,000, as evidenced by an email from Fleur McDonald to our client dated 1 February 2001, a copy of which is attached. 1.4 Further unilateral variations to the agreements referred to in clauses 1.2 and 1.3 above were subsequently attempted by Fleur McDonald on 23 February 2001 and by Peter Brown on 7 March 2001 and our client consistently did not agree to these changes. We attach copies of the relevant e-mail and letter. 1.5 Even more seriously, Peter Brown in the same letter ignored the ASP Agreement and purported to introduce a target of 12,000 new subscribers for the year 1 April 2001 to 31 March 2002. Jayne Blake of Vodafone confirmed on 7 March 2001 that the target could not, in accordance with the ASP Agreement, be less than 12,000 new subscribers per quarter. 1.6 MI has relied on the ASP Agreement and, as Vodafone is aware, has made representations in its prospectus and to the market place based on the ASP Agreement. Our client is concerned that as a result of the actions of Vodafone set out above, Vodafone does not intend to fulfil its contractual obligations under the ASP Agreement, thereby causing loss and damage to MI. 1.7 Our client is most disturbed by what appears to be a consistent pattern of conduct on Vodafone's part, particularly at this time of Vodafone's financial year, inter alia, to unfairly, unreasonably and unilaterally change previously agreed numbers of new subscribers. This has caused, and continues to cause, serious damage to our client and is not the sort of conduct that the market would expect of a company of Vodafone's stature. If this continues, our client will be compelled to disclose what is occurring to the market, in terms of the ASX Listing Rules. In addition, our client reserves all its rights in relation thereto. 2. ACM Agreement 2.1 Pursuant to the ACM Agreement, Vodafone agreed to provide MI with 30,000 additional customers by 30 June 2000. This transfer did not occur by that date and has still not yet occurred. Accordingly, Vodafone is in breach of its obligations under the ACM Agreement. MI is suffering loss and damage as a result of this breach and all its rights are reserved. 3. Lack of Confidentiality 3.1. Our client is most perturbed that Vodafone's employee's appear to have advised third parties that it does not intend to fulfil its obligations under the ASP Agreement. Not only would this constitute a clear breach of contract, but even suggesting it can cause irreparable damage to our client. We have been instructed by our client to demand that Vodafone provides: 1. to MI at our offices by 5pm Tuesday, 13 March 2001 , an undertaking to honour its obligations as previously agreed, in regard to the new subscriber levels for the March and June quarters; and 2. confirmation that steps have been taken to ensure that no further damaging information is disclosed to any third parties. Should the above not be received by 5pm, 13 March 2001, our client will be compelled to take steps to enforce its rights without further notice." 9 March 2001 MC9 dispute 445 Mr Marchbank gave evidence that as at the date of the meeting, the parties had entered into an agreement about the CTM to be paid to Mobile: " AFFIDAVIT OF MR MARCHBANK SWORN 22 MAY 2002 70. On 9 March 2001, I met with Mr Clubb and Mr Ogrin at Vodafones offices in Chatswood. During this meeting I had the following conversation: Mr Marchbank: "We agreed prior to marketing the $9 plan that they would be billed monthly at $7 per month CTM. Mr Clubb: "I think you should focus on more important issues than the CTM on the $9 plan." Mr Marchbank: "It's an important issue for us and you are withholding payments from us." Mr Clubb: "We need to address many more important issues that affect the whole agreement before we get into that detail." 446 In cross-examination Mr Ogrin gave the following evidence: "Q. There is just one other conversation that Mr Kerr draws my attention to. Some time later in 2001, in March, you had a meeting with Mr Clubb and Mr Marchbank at Vodafone's offices in Chatswood when Mr Marchbank asserted that there was an agreement prior to marketing the $9 plan that they would be billed monthly at $7? A. No. Q. You don't remember that? A. No, I don't agree. Q. And Mr Clubb said "I think you should focus on more important issues on the CTM than the $9 plan"? A. I do recall him talking about it, yes. Q. And Marchbank said "it is important for us and you are withholding payment" and Clubb said, "we need to address many more issues that affect the whole agreement before we get in that detail"? A. To that effect, yes, Mr Clubb was conveying that message. Q. But what about the part where Mr Marchbank said "We agreed to an assertion by him that we agreed prior to marketing the plan that they would be billed monthly at $7". You don't accept that? A. I don't accept that, no." [Transcript 1039] 447 Mr Clubb was not called to give evidence. 12 March 2001 6/ 776 448 On 12 March 2001 Mr Clubb (who was not called) withdrew his offer of a meeting to develop an alternative proposal. [776] 449 On 12 March 2001 Mr Stormon sent MI his findings of a review carried out in October 2000 [797] which referred to Mobile Innovations as "an effective direct marketing operation." Mr Stormon's explanation was that this had been prepared earlier. 13 March 2001 450 On 13 March 2001 Mr Stormon [830A] said that Vodafone scenario "at present..." "in a nutshell" was "looking for higher value customer (33+) for a quarter". 451 On 13 March 2001 Ms Statham provided a redraft of the June 2001 quarter business plan (Version 2), with an increased numbers on the high access fee plans, to Mr Stormon (6/830B-C). 15 March 2001-Mobile Revised Budget Impact document-exhibit P5 452 Mr Ogrin had become aware of this internal Vodafone document in 2001 at a time when his role was involved in business planning for sales and marketing, he having worked with Mr Clubb and with finance on looking across all the channels including Mobile. He saw a document of this nature in that regard. He was told in March 2001 or about this time that there had been an instruction from management to cut all Mobile Innovations connections [Transcript 1045]. The document Exhibit 5 was a revised version of an earlier document [Transcript 10407]. 453 The Revised Budget is appended to this judgment as appendix "G". 454 Mr Ogrin recalled that Exhibit 5 was the subject of Vodafone meetings at which he was a party in February and March 2001, the other participants as far as he could recall, being Mr Clubb, Mr Townsend, Ms Blake and Mr Brown. His evidence included: "Q. Can you explain to his Honour how this works; just looking at the revised column for a moment; the cost to acquire is reflected at $450 per subscriber? A. Mhm. Q. The base acquisition margin at 42 making a total of 492, right? A. Yes. Q. The current Mobile Innovations cost to manage is reflected there at $7.70? A. That's right. Q. And then there is a line headed "Revised cost to manage"? A. Yes. Q. That reflected discussions in Vodafone, did it not, that what was intended to be done was to bring down the cost to manage that was being paid to Mobile Innovations under the ASP agreement? A. The discussions I had relating to Innovations at this time was very much at the connections level. There were other meetings that were held on matters of this budget which were handled by finance, relating to customer management. Q. You can't assist with his Honour what the $4.50 connotes as a revised MI CTM? A. I can't, no. Q. One has the additional customers, 400000, that was a proposed idea within Vodafone to compensate somehow Mobile Innovations for a reduction in its cost to manage? A. That's correct. Q. And in that context does that assist you in recalling what the revised MI CTM of $4.50 might be? A. Yes, actually you are right; there was a view that if we could shift the focus from customer acquisition to customer management by sharing some of our segmented base then we would revise the CTM accordingly, yes. Q. If one looks at this document it, as you understood it at the time, it envisages, instead of paying Mobile Innovations $7.70 for managing 200000 customers, it is going to pay Mobile Innovations $4.50 per customer for 600000? A. Yes, that's correct. Q. That would be a difference of $3.20 per customer, right? A. Correct, yes. Q. And if one did the calculation on 200000 for a year - I won't ask you to do the calculation now - but accept from me that it comes out a 7.68 million dollars? A. Okay. Q. If one works out what the increase would be or the figure would be on paying $4.50 on 400000 customers the difference at the end of the day, negative for Mobile Innovations, would be something around about, on my calculations 4.9 million? A. Yes- Q. As you understood it the position was that what was under consideration was a plan, firstly, to substantially reduce Mobile Innovations' connections for the year commencing quarter one 2001? A. Correct. Q. And there was an idea to transfer 400000 subscribers to Mobile Innovations? A. Correct. Q. But reduce the cost to manage that would be paid? A. Correct. Q. Resulting in some substantial net saving to Vodafone? A. The - correct, yes." [Transcript 1045-1046] 15 March 2001 6/ 831 455 A letter was written from Mr Marchbank to Dr Clark, the CEO of Vodafone. The letter addressed Mobile's concern that Vodafone was withholding approval of business plans. The letter included: "Mobile innovations…works to media and creative lead times, with forward planning essential to achieving cost and subscriber targets. Critical lead times for April and May have already expired. Vodafone is withholding its approval of our business plan (CTA) even though subscriber numbers for the March (19K + 5 K) and June (23 K) quarters have been agreed. Further, approval for marketing offers for April onwards has also been withheld which means that more deadlines are being missed.….It is clear irreparable damage is now occurring and Vodafone appears to be taking no steps to resolve this issue." 16 March 2001 Henry Davis York response 6/ 833 456 Henry Davis York's response [833] was not to deal with the complaint, simply to deny it and resort to the dispute mechanism. This was the first response of Vodafone to the notification of a claim. Deacons sought to expedite the process [16/3/01 - 835]. Henry Davis York declined and nominated Mr John Townsend as Vodafone's representative for a resolution meeting. [837] 457 Mr Marchbank rejected the suggestion that "the parties proceeded in their relationship between May of 2000 and March of 2001 as if any obligations under the agreement were at an end" (Mr Marchbank Tr 366/1-25). That proposition was not put to either Mr Bramwell or Mr Shaw. 458 On 16 March 2001 Mr Bissex' resignation was announced. [832] 20 March 2001 459 During this period a number of meetings took place and correspondence passed between the parties about the June target and CTA. [cf appendix XX pages 84 et seq] 460 Mr Marchbank gave evidence that on 20 March 2001 Mr Stonell and he attended a meeting with Mr Townsend at Vodafone's office during which they had a conversation: Mr Townsend: "Vodafone are withdrawing all plans from Mobile Innovations that have an access fee of less than $17." Mr Marchbank: "I know that it is Vodafone's right to do so but that makes our cost to acquire targets quite difficult to achieve, particularly with such short notice. The brands that we use would have to change. We submitted a plan with higher value offers in it a week ago and I am still waiting for your feedback. Please acknowledge that higher plans mean higher costs with relation to handset and media. Customers who buy higher plans require more expensive handsets and are not so numerous as customers who require lower value handsets. Therefore use of the Vodafone Direct brand is quite important. However, even with the Vodafone Direct brand, the CTA will be $100 to $200 more for a high spend customer than for a low spend customer. Mr Clubb: "Anything you do under Vodafone Direct brand will have to be approved by my marketing and channel management and be consistent with any other offer inside a dealer or a shop. Mr Marchbank: "In the direct marketing channel we need time to plan and a differentiation from the retailers. If we are consistent with your stores there is no point having a direct marketing channel. We must be different, not necessarily cheaper." Mr Townsend: "We need you to prepare a cost to acquire business plan for 19,000 connections at $450 per connection for June." Marchbank: "We really need to discuss which offers, phones and brand we use before we can agree to such a cost target or even a volume target. $450 with no ability to connect a plan of less than $17 a month is too aggressive for us to be able to agree to." Mr Stonell: "Has a retention budget been allocated to Mobile Innovations because we are used to receiving this well in advance of the quarter?" Ms Blake: "We don't foresee this being a dispute. However, we don't have an obligation to provide you with retention funds according to the ASP Agreement." Mr Marchbank: "You have done so for the last eighteen months and so it's unreasonable for you to withhold it now." Ms Blake: "We are not withholding it. We're just considering it." Mr Marchbank: "The combination of not having a CTA business plan, withdrawal of offers and disagreement on direction regarding retention is proof that Vodafone have no intention of honouring its obligations to Mobile Innovations under the ASP Agreement. The letter I received from Peter Brown in March told us there was going to be no acquisition activity whatsoever beyond July. It is impossible for us to construct a marketing plan that we can implement with the dollars that Vodafone are making available and the value of customers that Vodafone want to attract. It is my impression that Vodafone's actions are reflective of the fact that Vodafone are trying to undermine and extract themselves from the ASP Agreement." As we were leaving the meeting I said: "What do you feel the next six months holds for Mobile Innovations because we are getting very worrying indications that there is going to be no cost to acquire after the June quarter." Mr Clubb: "It does look pretty grim. You should probably go out and look outside Vodafone to chase new business and replace the level of business that you were expecting this year from us." 461 Mr Marchbank was cross-examined about this conversation. Particular emphasis was given to the planned withdrawal of all plans with an access fee of less than $17; and issues of the calculation of the CTA for the June quarter. [Transcript 442 – 5] 462 Ms Blake gave evidence that on 20 March 2001 she attended a meeting with MI. The attendees included Mr Townsend, Mr Clubb and Ms Larkin representing Vodafone. Mr Marchbank and Mr Stonell were present representing MI. 463 On her evidence the following discussion took place: Mr Marchbank: " We need your guidance on what you need from us in the future. " Mr Townsend: " We need to address the profitability of the customers you are acquiring. " Mr Clubb: " But today we'd like to discuss the CTA for the next quarter. " Mr Marchbank: " That's also our priority, but we do need a longer term view to plan for the future. " Mr Townsend " We want to make sure we capture Vodafone's strategy of more profitable connections in whatever we agree for the next quarter. " Mr Marchbank: "We have no problem with that. Just to update you on the current quarter, we will connect 2,000 to 3,000 more than the target. We also expect 23,000 for the next quarter, in line with Denys Webb's letter." Mr Clubb: "That agreement no longer stands." Mr Marchbank: "We don't believe you can withdraw it. We believe the target is still 23,000." 464 On her evidence there was a further discussion on the target for the June quarter, after which the conversation moved on as follows: Mr Townsend: "Vodafone will be withdrawing the $9 plan from its product range during the quarter. The only plans we will connect are $17 plus." Mr Marchbank: "But we already have $9 ads out there that were approved by you for April." Mr Townsend: "That's OK for April, but the $9 plan will have to close after April. It's not economic for us." Mr Marchbank: "If we sell higher plans, CTA will increase and volumes are also likely to fall." Mr Townsend: "As I said, we cannot continue with the $9 plan. It's not economic." Mr Marchbank: "We know you have the right to set and withdraw plans, but it seems that you are not really committed to the ASP Agreement." Ms Blake: "We have no intention of walking away from our obligations under the contract. But we do need to discuss how we can make it work better for both parties." Mr Stonell: "We also need to know what our retention budget is for the quarter." Ms Blake: "OK. We will get back to you on that one. Could you also let us have your estimates for CTA for the quarter, based on our discussions?" Messrs Stonell/Marchbank: "We already gave it to Peter Brown a week ago." Mr Townsend: "We need it to be based on 23,000 connections at $450. That is the maximum commitment we can make." Mr Marchbank: "We need to settle this as soon as possible." Mr Townsend: "Let's try to agree this by COB tomorrow. Could you confirm handsets and offers associated with the remaining plans after the $9 plan is withdrawn." Mr Marchbank: " We'll do that. And ongoing, what can we expect for say, the next 6 months? " Mr Clubb: " We need to continue to focus on payback and profitability. " 465 Issues including low cost plans and retention funding were discussed. [6/842-843; Mr Marchbank 22/5/02 para 100] 20 March 2001 6/ 844 Draft CTA for June quarter appears at 6/ 764 21 March 2001 Amended CTA CTA for the June 2001 quarter was based on 19,000 new subscribers 6/ 851 466 A letter of 21 March 2001 from Mr Townsend to Mr Marchbank [6/ 851] detailed an amended CTA by way of 19000 target for gross connections. The letter purported to be "without prejudice", [851] and put a proposed CTA including $9 plans, $11 plans and $17 plans. [852]. Critically, the plans now included substantial charges for handsets. [852] 22 March 2001 467 A letter was sent from Mr Marchbank to Mr Townsend outlining Mobile's response to the letter of 21 March 2001 (which contained the CTA for the June quarter). [6/ 862] 468 Mobile asserts in this letter that the CTA for the June quarter is "not achievable", and sets out the reasoning behind this view. 469 Mr Marchbank gave evidence under cross-examination about the contents of this letter. Particular focus was placed on paragraphs 1-3 and c of the letter. [Transcript 459-460] Finding as to contextual background 470 The detail of the negotiation of the June quarter business plan and the dealings between the parties with respect to the September quarter is to be found elsewhere in this judgment. Importantly I accept as made out the plaintiff's submission that Vodafone's behaviour is to be seen in the context that it had by March envisaged a nil target for the September and subsequent quarters. 471 I interpolate to add that significantly once the parties were in dispute on the September quarter Mr Townsend asserted on 5 July 2001 (TB1025) that the September CTA had been agreed between the parties without qualification and that Vodafone was proceeding on that basis. 29 March 2001 472 A further meeting between Ms Statham, Mr Stormon, Ms Blake and Mr Marchbank, took place on 29 March 2001 where Ms Statham presented a strategy on behalf of Mobile about recommended phone plans. During the presentation Ms Statham provided Version 6/mix 1 of the CTA worksheet for the June 2001 quarter. The costs outstanding for the hosting of the website were also raised. [6/ 897-6/ 906] 30 March 2001 6/907-913 473 Ms Statham provided Vodafone with Version 6/mix 2 of the CTA worksheet for the June 2001 quarter. [6/ 907-913] 474 On 30 March Ms Jones provided Ms Blake and Mr Fell, of Vodafone, with information on MI "out of contract customers" for the April to June 2001 quarter and requested Vodafone's agreement to upgrade the customers. [6/ 915 - 917; Mr Marchbank 22/5/02 para 146] 475 Two days later, Ms Jones provided Mr Stormon, Mr Fell and Ms Elliott with a breakdown of Mobile Innovations' customers in each value band (6/938AA – 938AD). 3 April 2001 476 Communication from Mr Townsend to Mr Marchbank, which discussed the CTA schedule and the June quarter business plan. [6/ 928] 477 Vodafone accepted a target of 19,000 connections at the nominated CTA. 478 Ms Blake gave affidavit evidence that on 3 April 2001 she participated in a telephone conference with Mr Stormon, Mr Bramwell and Mr Marchbank. On her evidence in the course of the telephone conference, the following discussion occurred: "Ms Blake: "We have given you fair warning of our intention to clawback the CTM on the $9 customers. Our communications have always been in line with this." Mr Marchbank: "But you agreed to my letter of 4 October." Ms Blake: "I have not seen that letter but we have been communicating since December that the ARPU was falling below $30 and we would be paying the reduced CTM in line with the amendment agreement." Mr Marchbank: "My understanding is that the 4th of October letter supersedes the amendment agreement." Ms Blake: "I don't agree with your understanding of this. The intention behind the amendment agreement was for any low value plan to receive a lower CTM. We have always made a concession along the lines of the ARPU test contained in the $20 plan referred to in the amendment agreement. But when ARPU falls below the $30 we have always paid a lower cost to manage CTM in line with the ASP." Mr Bramwell: "But we cannot bill the $9 plans quarterly because of the free minutes." Ms Blake: "But the ASP agreement addresses that point and clearly says 'whether or not free minutes are included'." Mr Bramwell: "But we can't bill these quarterly." Ms Blake: "It's not economic to put them on and pay the higher CTM. These $9 customers are negative NPV and never break even for Vodafone." Mr Bramwell: "With all due respect Jayne, Vodafone's economics are not of my concern." 479 Mr Bramwell was cross-examined in relation to this conversation and gave the following evidence: "Q. Do you remember Ms Blake indicating or asserting that Vodafone be given fair warning of its intention to claw back the cost to manage of the $9 customers? A. I don't remember that specifically, no. Q. May we take it from that you don't recall Mr Marchbank protesting about that course? A. I remember - my memory of that meeting is, without referring - no, my memory is slightly hazy regarding the comments. There was some issue over - I think Vodafone wished to claw back a subscriber management charge in relation to the $9 plan, yes. I remember that discussion. Q. I don't want to be unfair to you about this, if you can't remember anything about the discussion I won't ask any more about it. A. I do remember the purpose of the discussion. Q. Yes, and Ms Blake asserted, didn't she, that the May 1999 agreement was - the effect of that agreement was that for any low value plan Mobile was to receive a lower management fee? A. I seem to remember a discussion surrounding the amendment agreement at the time, yes, and its relevance. Q. And that in relation to the $9 plan it was proposed to enforce that agreement, not always, but only when the ARPU fell below $30? A. I believe there was some discussion of a letter dated - I think it was 4 October. Q. Yes. A. From Mr Marchbank to Vodafone. Q. Yes. A. Outlining Mobile Innovations' position regarding the $9 plan. Q. Yes. A. Which we believed superseded or in fact removed the $9 plan from that definition under the amendment agreement. Q. In effect you wanted more money than was payable to you under the May agreement? A. I think the issue here is very - well, I believe it's quite straightforward. The original call plans that were the subject of the amendment agreement, that the basis of the reduction in cost to manage was on the assertion that they would be billed quarterly. As far as we were concerned, the $9 plan subscribers, because of the quantity of included and bundled minutes, would effectively have been impossible to bill on a quarterly basis. Q. So you notionally made an amendment to the May 1999 agreement - sorry, you sought an amendment to the May 1999 agreement to put a qualification that the low tariff would only arise in circumstances where there was not quarterly billing? A. I think we made it clear at the time before actually marketing the $9 plan that it needed to be incorporated as a $7 access fee - sorry, as a $7 management plan because of the issues surrounding the bundle 3 minutes. Q. You weren't a party to any of these discussions, were you? A. I was aware of Jonathan Marchbank's letter of 4 October, yes. Q. And were you aware that all that Vodafone was prepared to agree to was to pay the higher fee when the ARPU was something in excess of $30? A. My understanding was that Vodafone had already agreed to pay a $7 cost to manage and the letter of 4 October was confirming that fact. Q. That was certainly not an agreement that you were party to the making of, was it? A. No. [Transcript 219-220] 3 April 2001 480 A letter from Deacons to Henry Davis York was witten. 5/6 April 2001 – June 2001 business plan 6/ 939; 6/ 946 481 On 5 and 6 April 2001 through an exchange of correspondence, Mobile alleges that Vodafone and it agreed a business plan for the June 2001 quarter already described as claim 4. The allegation includes that the target level for new subscribers was 14,150 that Mobile would be provided with a new $15 call plan with tariff rate equivalent to those offered on the MC 9 plan and other matters. The issue is dealt with below. 9 April 2001 482 A letter from Mr Stonell to Mr Townsend. 6/950A. responded to paragraph 2 of the letter of 6 April 2001 in relation to reduction in CTM. The initiatives identified by Mobile included reducing the service level in customer service to 60/40, closing customer service on weekends and reduced mid-week opening hours. The saving was estimated to be $20,000 per month. Mr Stonell stated in that letter that he expected the initiatives could be implemented "shortly after the $9 plan, Vodafone Direct website and Retention funding issues have been resolved." 11 April 2001 483 Final CTA for June quarter sent yo Mr Stormon from Ms Statham in an email. [6/ 952] 484 Mr Marchbank presented a report to the Mobile board on 11 April 2001 [6/ 957A-6/ 957C]. This comprised a further update in relation to recent developments. This update included the following: "The cause of our current upheaval, is that V UK has told V Australia to connect and retain only 'valuable' customers. V no longer requires volumes of low value customers, traditionally MI's strength. Incredibly this policy will lead to a significantly smaller Vodafone – they think, more profitable. CTA MI and Vodafone have agreed a 'CTA' business plan for the June quarter. This is substantially less than had been planned for (14k new connects vs 23k) M! have agreed to "upsell" and introduce new plans to search for value/ARPU from these customers. MI has agreed to this plan under protest, because we were already in April with no plan and needed to agree something. It keeps us moving in May and June, and April is already damaged by the delay in agreeing & Easter/Public Holidays. Vodafone have indicated that they will meet with us again in early May to discuss what they propose to do with M! in the longer term. Incredibly John Rohan told us to 'forget what we have told you in the past'. Vodafone has made it clear that they want the relationship to continue – but want MI to be flexible. It is expected they will ask us to operate on minimal new connections in the next 3-6 months. Vodafone are now being careful not to show that they are undermining the ASP agreement. The effect of the reductions in volumes/sales since Jan has knocked about $350k off the net profit line. … Summary These four issues need to be resolved before we can ascertain whether we have a positive or negative business with Vodafone in FYO2, but its clear they are using the ASP contract to serve their new 'value' focus, and our options are to fight or to change, either way it is unlikely to be as lucrative an agreement in the future for us." [6/957A] 485 In April 2001 Vodafone prepared a strategy paper entitled "The Way Forward" [7/970A]. This document contained a detailed analysis of call aspects of Vodafone's business, and was clearly included to give effect to the budget strategy referred to above. The Executive Summary described the strategy in the following terms: ""This document is an Integrated Sales & Marketing plan designed to address recent dramatic changes in the strategic objectives for Vodafone Australia. These changes have arisen due to a sudden global shift from an acquisition and market share focused strategy to one focused on profitability and return on investment. This represents a major turn around for the business which was tasked with delivering a No 2 market share case only 12 months ago. After achieving record growth levels in the past year we now face the challenge of downsizing the output but improving the quality of our distribution channels and improving the strength of our Brand in a business which has traditionally had poorly coordinated investment in this area. Reduction in acquisition & retention costs will become paramount to improving profitability, however, reducing costs in these areas must be linked to protecting our routes to market – distribution our competitors are keen to secure. Within these constraints, this document aims to identify "the way forward" for Vodafone Australia over the next three years." [7/970C] 486 The paper contains a detailed analysis of: (a) the market dynamics and forecasts and a prognosis that there will be a decline in new additions to the market from 3.1m to 1.8m connections (this was attributed to there being fewer new customers entering the market as penetration approached saturation); (b) an overview of Vodafone today; and (c) an analysis of each of Vodafone's competitors. 487 The paper refers to five foundations for the way forward. These are the Brand (section 11), Products & Services (section 12), Tariffs and Pricings (section 13), Retention, Loyalty & CRM (section 14) and distribution (section 15). 488 In relation to the third foundation, Tariffs & Pricing, the paper stated as follows: " Focusing on High Value Customers The second component of our pricing objective is to focus on value. In order to deliver company profitability objectives our offers and incentives must specifically focus on higher value customers. This will be supported by:- • A segmented approach to pricing & tariffing • Increased differentiation between offers to low and high value customers • Stronger focus on retention pricing." [7/970AY] 489 One of the key changes identified in relation to Tariffs & Pricing in section 13.2.1 was to "focus on high value customers" [7/970AZ]. 490 In relation to the fourth foundation "Retention, Loyalty & CRM", an analysis is presented of Vodafone's proposed retention policies. Section 14.3.2 contains a table setting out five value segments in relation to customers and the profitability of each of those segments. Band 5 of the customers with an average monthly spend of $0 - $30 is said to be unprofitable and the band $30 - $50 has a profitability "TBA". The profitability of customers commences according to this analysis at the level of $50 plus spend per month. On the basis of this analysis, the strategy paper proposes that upgrades only be available to customers with an average monthly spend of $30 or above [6/970BD]. 491 In relation to the fifth foundation "Distribution", the paper makes significant reference to the Mobile relationship as follows: "15.3.7 Affinity Partnerships and On-Line The strategy underpinning this channel is primarily one of rationalisation, driven by the desire to attract high value customers. Key components of this strategy include: • The re-positioning of the relationship with Mobile Innovations. • The re-positioning of the Vodafone Direct and Vodafone On-Line channels to provide higher value customer acquisition primarily for those customers who wish to purchase online or via direct response for reasons of convenience. • Affinity relationships to be developed such as Ansett. • The provision of a virtual store" [6/970BJ]. 17 April 2001 492 Vodafone wrote on 17 April to Mobile about the CTM issue [7/ 961]. The following paragraphs indicate Vodafone's position on the issue: "The subsequent introduction of $15 and $10 plans saw MI request the application of the ARPU test used in the amendment agreement for the $20 plan. In contract, the amendment agreement clearly states that MI agreed to be paid a lower management fee for all customers on plans below $20, irrespective of ARPU. Yet, in good faith Vodafone met MI's request and gave a concession treating these low value users in the same manner as the $20 plans. In short, if the ARPU of these low value users was greater than $30 per month. Vodafone paid MI the higher management fee…. It is within this factual background that the $9 plan must be considered. MI's suggestion that it is entitled to the higher management free for the $9 plan, irrespective of ARPU, is contrary to Vodafone's concession. Vodafone's concession has always been based on the condition that a low value plan has an ARPU above $30 per month. The suggestion is also inconsistent with Vodafone's rights under the amendment agreement, where the $9 plan clearly falls within the category of low value users and should attract the low management fee." [7/ 962] 27 – 30 April 2001 493 Emails between Mr Stormon and Ms Statham about the costs surrounding the hosting of the website. [7/968; 7/969; 7/971; Mr Stormon para 92; Mr Marchbank 22/5/02 paras 35-6] 1 May 2001 494 On 1 May 2001 Mr Stormon sent an email to Vodafone in relation to the Website. Mr Stormon advised that Vodafone could not commit any funding to the maintenance of the current site, particularly on the basis of the volume of sales generated through the website. Mr Stormon said that this was "the old story of us only doing business where it is viable and e-commerce is no exception." [6/971] 2 May 2001 495 Mobile responded to the letter of Vodafone dated 17 April 2001. The position of Mobile is set out as follows in the letter: "Mobile Innovations disagrees with Vodafone's interpretation, specifically of MI's entitlement relating to CTM funding of the $9 plan described in your letter. MI has specific correspondence from Vodafone's marketing and finance team relating to the $9 plan CTM, which it believes is clear evidence that the CTM should still be paid at the higher rate ($7.67), until reviewed in October 01. Accordingly, it would appear that a dispute, as the term is defined in the ASP Agreement, is still current in relation to this issue. Please take this letter as constituting notice pursuant to sub-clause 32.1(a) of the ASP Agreement." [7/ 978] 2 May 2001 Beginning of negotiations for the September quarter 496 Ms Statham asked Mr Stormon to nominate Vodafone's target for the September quarter. [7/ 979] 4 May 2001 497 Meeting between Mr Marchbank, Mr Townsend and Ms Blake. 498 Ms Blake took notes of the meeting [7/ 981C]. At that meeting Mobile stated they were happy to get the value of existing customers up, as well as new customers. Mobile were also happy to look at ARPU. Vodafone made the point that it was customer profitability and that this meant lower costs as well as higher ARPU. Options which were discussed included the targeting of tradesmen and Mobile selling pre-paid plans. Mr Marchbank's feedback on the new $17 Plan was that it was not really popular as it was "nothing they can't get elsewhere." [7/ 981C] 499 Mr Marchbank followed up the meeting with an email to Vodafone stating that Mobile was "not wedded to the ASP agreement if an equivalent alternative is available". However, he said that the "equivalent alternative" must be proposed by Vodafone. Mr Marchbank then stated: "In the meantime MI must operate under the terms of the existing agreement & we will continue to seek CTA planning for the September quarter, during May. The ability for MI to sell up to new 'higher value' plans will be limited, unless the Vodafone Direct brand is available, and adequate differentiable tariffs are approved. These will be key in achieving a satisfactory outcome, as will retention funding. We are also keen to discuss ARPU generating ideas for our existing base." [7/ 981] 11 May 2001 Retention Meeting 500 A retention meeting was held on 11 May 2001 during which meeting Vodafone advised Ms Boardman (formerly Ms Jones) and Ms Couper that customers who spent less than $30 a month would not be upgraded (7/ 1000-1001; Mr Marchbank 22/5/02 para 147). 14 May 2001 501 Email from Mr Stormon to Ms Statham and Mr Marchbank setting out the targets for July, August and September (including, for the first time, the proportions of rate plans to be reached). 15 May 2001 502 On 15 May Mr Marchbank responded to the email from Mr Stormon. [7/1027]. Issues of concern identified in the letter included (in summary): "1. marketing $17 and higher plans using the MI brand for had not been successful – these plans would be Vodafone Direct branded (Vodafone to provide guidelines); 2. approval for the $15 plan was "urgently await[ed]" ; 3. MI knew of no affinity programs Vodafone currently had running, making the 1,600 target unrealistic; and 4. Vodafone's concentration on higher value plans would drive up CTA, having regard to competitive offers available from Telstra and Optus." 18 May 2001 503 By 18 May 2001 the $15 plan was with the Vodafone tariff committee for approval (7/1011). 23 - 25 May 2001 504 Communications between Ms Statham, Ms Blake and Ms McDonald to resolve the $15 plan issue. [7/ 1043; 7/ 1058] 28 May 2001 505 On 28 May 2001 Vodafone prepared a CTA worksheet [7/ 1064 et seq]. Up until this point in time there had been no dispute about matters such as nil targets [Transcript 704]. However historically as Mr Stonell put it: "We would start dealing with the quarter that was going to happen a month and a half prior to that quarter starting, but in most situations it wouldn't start until a couple of weeks before the quarter, and in a lot of cases we would be in the quarter and still trying to work out what the targets would be. [Transcript 704] 29 May 2001 506 Mobile informed Vodafone of planned redundancies. 31 May 2001 507 Ms Statham appears to have met with Mr Ogrin and Mr Oswald on 31 May 2001, following which she revised the CTA worksheet (Version 2), but noted that in doing so that MI "did not accept this as a business plan" [7/1082-8]. 6 June 2001 508 Communication from Mr Rourke to Mobile presenting Vodafone's position in relation to the CTA for the September quarter. [7/1107] 8 June 2001 [7/ 1116] 509 The officer at Vodafone in charge of tariffs wrote to Mobile about an aspect of their proposed $15 plan. [7/ 1116] 13 June 2001 510 Vodafone sent Mobile an email confirming that approval had been obtained for the $15 plan. [7/ 1124] 14 June 2001 511 Mr Marchbank responded via email to the communication of Mr Rourke on 6 June, setting out the reservations of Mobile in accepting the CTA for the September quarter. [7/ 01127] 15 - 18 June 2001 512 Email communications between Ms McDonald and Mr Marchbank about the CTA for the September quarter and the conditions imposed on the acceptance of that CTA. [7/ 1139; 7/ 1143]. 513 In an email to Ms McDonald dated 18 June, Mr Marchbank stated: "As discussed this morning, MI accepts the CTA for Sept quarter as outlined below. Could you please provide us with: 1) written advice re redundancies (ie what your intentions are?)…" [7/01143] 514 Under cross-examination Mr Marchbank gave the following evidence: "Q. Then you said, "Could you please provide us with written advice re redundancies". That is what your intentions are. You didn't say, did you, to Ms McDonald, 'Well, I will agree to the plan if we can reach agreement on redundancies'? A. Ms McDonald was well aware of that position. Q. Didn't you think - so what you are saying is Ms McDonald should have read this as reading what the words "What your intentions were" as meaning this agreement is conditional upon that issue being resolved? A. I think back on the fifteenth, I can't be sure of the date, back in May it was made very clear that redundancy was a concurrent separate agreement which was what Vodafone requested. It wouldn't form part of the CTA but we wouldn't agree to the CTA until we agreed to where the redundancy costs were at…. "…A. I agree it's not clear. Q. It's misleading if it means what you say, isn't it? A. It is taken out of context with the other communications at the time." [Transcript 492] 515 Ms McDonald was not called to give evidence. 19 June 2001 516 Ms Kenny raised an issue in relation to tariffs, in response to the letter conveying formal approval of the $15 plan. [7/1172] 20 June 2001 517 Mobile makes enquiries about this tariff issue. [7/ 1171; 7/ 1178; 7/ 1189; 7/ 1198] 518 On 20 June 2001 Ms McDonald informed Mr Marchbank that Vodafone had arranged a letter "approving estimate CTA to be signed by John Townsend. This includes all terms discussed including redundancies." (7/ 1148). 519 CTA formally approved by Vodafone in a letter from Mr Townsend. In his letter of 20 June Mr Townsend stated "Vodafone maintains its position that redundancies should not be included in the CTA." [7/ 1174] 520 Mr Townsend was not called to give evidence. 22/23 June 2001 521 On 22 June 2001 Ms Statham sent an email to Mr Marchbank about Vodafone Direct. Ms Statham understood that Vodafone did not have any guidelines for Vodafone Direct that could be provided to Mobile or Vodafone's other channels. Mobile's proposal, therefore, was to prepare advertisements based on what Mobile had seen in the press, which they would then submit to Vodafone for approval. Ms Statham also said that she wished to pursue the question of the 450 Affinity connections [7/ 1181]. 522 On 22 June 2001 Mr Buckley of Vodafone said that he would provide the Vodafone Direct guidelines as soon as they had been approved, however, in the meantime, Mobile should forward the advertisement creatives using the "old" Vodafone Direct logo for approval [7/ 1182]. 523 On 22 and 23 June 2001 Mobile sent emails to Vodafone asking for information about the proposed Affinity programs [7/ 1183]. 25 June 2001 524 Mr Ogrin responded on 25 June 2001 confirming that the old branding guidelines for the Vodafone Direct brand should be used until the proposed launch on 1 August 2001 of the new brand guidelines. He also advised that the following Affinity programs were "work in progress": Housing Industry Association, NRMA, Fly-Bys, Amex and Double Day [7/ 1185]. 26 June 2001 525 Approval given by Mobile of the CTA. There is some dispute, however, on whether or not the approval was conditional upon redundancy costs being incorporated into the CTA. [Transcript 493] 526 In cross-examination Mr Marchbank gave the following evidence: "Q… You decided not to tell Vodafone in this letter that approval in your mind was conditional on the September CTA being, approval was conditional upon the redundancy issue being resolved? A. I have to look at further correspondence. In this letter it is not spelt out in those terms, no. Q. Not at all. I want to suggest to you sir, you wouldn't believe that from a fair reading of this letter, would you? Do you agree with that? Look at it as long as you like? A. I think the whole letter is on the subject of redundancies, apart from the first paragraph, and the letter is in response to Mr Townsend's approval, for want of a better word, of the business plan for September. This letter attempts to outline the, I guess, the challenges in achieving the plan and also the major commercial issue of redundancies. Q. Do you seriously suggest to his Honour that a fair reading of this letter would indicate that approval by Mobile of the CTA for September was conditional upon resolution of the redundancy issue? A. In isolation, I don't think that's the conclusion you would reach." [Transcript 493] Early July 2001 527 Emails passed regarding disagreement about the $15 plan. [7/1195; 7/1199] 4 July 2001 528 On 4 July 2001 Mobile sent a letter to Vodafone suggesting a further meeting to agree a CTA Worksheet within the same budget but using components that Vodafone could define upfront, and suggesting that the current CTA plan could not be agreed as is. The bases upon which Mobile made this assertion were the following: (a) a complaint about the Vodafone Direct guidelines not being supplied, although Mobile acknowledged that it had provided Vodafone with draft advertisements for approval on 28 June 2001, on which it had not then had a response; (b) a complaint about the approved call rates for the $15 Plan and an assertion that Mobile had agreed to the $15 Plan on the basis of the plan having the same call rates as the $9 Plan. Mobile asserted that the new rates were " significantly more expensive than others on the market "; (c) a further request for the inclusion of an accessory pack in marketing the $15 Plan, to match the competitive offers of Optus Direct and Telstra Direct; (d) an assertion that Vodafone had not provided Mobile with " any real information relating to its Affinity programs "; and (e) an assertion that Vodafone had not yet responded to a proposal for including Mobile's URL on the Vodafone Direct advertising to generate additional sales [7/1199]. 5 July 2001 529 On 5 July 2001 Mobile forwarded what it described as the final version of a Vodafone Direct advertisement to Vodafone for comments. Ms Statham stated that the first advertisement would appear on the following Saturday [7/ 1201]. 530 Later that day Vodafone advised Mobile that the advertisement for the Vodafone Direct brand had been approved [7/ 1203]. 531 Ms Kenny of Mobile acknowledged Vodafone's approval of the advertisement in an internal email and stated that "[t]herefore, all systems are go for Vodafone Direct to be advertised" and making plans for follow up marketing activities in relation to this brand [7/ 1204]. 532 A Letter was also written on 5 July from Mr Townsend in response to the letter of 26 June 2001 from Mr Marchbank..This letter rejected Mobile's assertion that its approval of the September CTA was contingent upon operational marketing matters being resolved in good time. On the question of redundancies, Vodafone stated its view that: "the issue has been clouded and its early resolution delayed by MI persisting in including the issue in discussions about estimated CTA. Throughout those discussions Vodafone has maintained that it is not liable for MI's retrenchment costs and has sought to separate the issue from discussions about estimated CTA. … I therefore reiterate Vodafone's position that it is not liable to MI for Ms Statham's redundancy costs, or any other costs or expenses incurred by MI incurred as a result of MI downsizing its customer acquisition operations. While I am willing to meet with you in order to discuss this issue further, I doubt that such discussions will prove productive if MI is to maintain its position in relation to this issue." [7/ 1205] 7 July 2001 533 Mobile commenced marketing the $15 plan. 17 July 2001 534 On 17 July 2001 Mobile prepared a "Discussion Document presented to Vodafone: Suggested strategies going forward" [7/ 1211]. That document noted by way of background that MI have traditionally attracted customers by volume to low plans competing on $1 handsets, low cost per month plans, free calls per month and free accessories. Mobile reviewed the various competitive offers which were then available in the market. 535 In the presentation, Mobile stated that the $15 Plan was uncompetitive when compared to the offers of "our competitors - rollover, yes time, weekend, international, flat chat" [7/ 1220]. 536 Mobile reiterated its strategy of having a low cost offering, identified in the presentation as a $9 Plan, "to get the phone ringing" and then working the sales staff to upsell to plans of $15 or more. This was summarised as follows: "What do we need to increase our volumes? • A competitive offer at the low end to drive calls into centre; • Competitive rates & offerings on the existing $15 plan; • Budget to test higher plans; • Different offers for sales team to utilise & for speciality targeting via Direct Mail; • Vodafone Direct Website." [7/ 1121] July 2001 - December 2001 July 2001 on 537 Mobile complains that from July 2001 Vodafone had permitted other service providers into direct marketing. Pre 13 July 2001 538 Mobile asserts that prior to 13 July it attempted to negotiate a proposed business plan but that Vodafone failed to agree on estimated acquisition cost suggesting that it was nil. 13 July 2001 - Mr Marchbank invokes the dispute resolution procedure in relation to the September CTA [7/1222-1224] 539 On 13 July 2001 Mobile sent a letter to Vodafone in response to Vodafone's letter of 5 July 2001. In this letter, Mobile asserted that no agreement was in place for the September CTA and notified that a dispute in relation to the September CTA in accordance with clause 32.1 of the ASP Agreement. Mobile asserted that its approval for the CTA plan for the September quarter was conditional upon Vodafone "following through on the marketing assumptions made within that plan in a timely way, and on a concurrent agreement re redundancies". In this respect, Mobile stated: "A conditional agreement was reached on the September quarter CTA, (ref my letter of 26 June 01, and at previous meetings). The issue of redundancies was to have been agreed concurrently. Clearly there is no agreement on this issue, and it remains our position that redundancies form part of the CTA. We agreed to discuss them separately to the marketing issues, but concurrently. As we have been unable to schedule any meeting with Vodafone to agree to the above items, it is clear we do not have an agreement for the September quarter CTA." [7/1222] 540 In relation to the question of higher value customers, Mobile asserted that it could not connect 9,000 high value customers with only $1m advertising budget, no matter how good its operational efficiencies were. Mobile asserted that it had a plan to sell to higher value customers however, this required higher handset subsidies and marketing costs which were attributable to this segment of the market. Mobile also asserted that it had tabled many initiatives over the past 18 months to drive value and made it clear that it would accept changes to the ASP Agreement to accommodate the changing market and Vodafone's strategy. The letter also contained the following observations about the ASP Agreement: "The ASP model was engineered by Vodafone around its previous growth aspirations. It has been Vodafone's past directives, not MI's whim, that have led to MI generating what you determine as "low value customers". Whilst Vodafone's strategy may have changed, MI should not be penalised by Vodafone for continuing to operate in a growth/volume construct without a meaningful dialogue about re-aligning mutual objectives. MI remain positive and convinced (as evidenced by Telstra/Optus/Orange's direct strategies) that Vodafone's new objectives can be reached through MI if timely marketing plans and approvals, as well as adequate funds are made available." [7/ 1224] 17 July 2001 Discussion Document presented to Vodafone – Suggested strategies for going forward" [7/ 1211- 7/ 1221] 541 Notwithstanding a productive meeting on 19 July 2001 at which MI presented a strategy paper (TB1211-1221), Mr Townsend set a nil target for the December quarter on 23 July 2001 (TB1228). Mr Maher (Tr 807/1-9) gave evidence that Mr Rohan, the then Managing Director, would have taken the decision. Mr Rohan was not called. 542 I accept as of substance the plaintiff's submission that it is significant that this was nearly 3 months before the commencement of that quarter. There were no discussions of any business plan and on my findings never before had a target been set that far in advance. 18 July 2001 7/1225-1227 543 On 18 July Mr Townsend replied to the letter of 13 July. [7/1225 - 1227] refuting Mobile's assertion that there was no agreement in place in relation to the September quarter CTA. Vodafone also reiterated its position in relation to redundancies, and suggested a meeting on 19 July 2001 to focus on the respective parties' future activities. [7/ 1125] 19 July 2001 544 A without prejudice meeting between Mobile and Vodafone took place on 19 July 2001. Following that meeting, Vodafone advised Mobile that target of zero connections would be set for the December 2001 quarter. This advice was confirmed in a letter on 23 July 2001 in the following terms: "I refer to our meeting of 19 July 2001. We feel that at this stage it is necessary to consider the December 2001 quarter and the target levels for that quarter. In this respect, we advise that we have decided to set the target levels for that quarter at nil connections. This will trigger the operation of clause 18.3 of the ASP Agreement and Vodafone will pay to M! the Base Acquisition Margin in accordance with that clause. Therefore, it is not necessary to prepare & review any estimated CTA for the December 2001 quarter. We believe there were some positive discussions at the meeting during which we reconfirmed Vodafone's customer acquisition objectives. We look forward to reviewing M!'s proposals in achieving Vodafone's customer profitability strategy." [7/ 1228] 23 July 2001 – Nil target notification 7/1228 545 The 23 July 2001 written notification that target level for December would be "nil" was sent and received. [7/1228] 27 July 2001 and following – redundancies 546 Mobile claims that it made several employees redundant from 27 July 2001 up to 31 January 2002 in response to this communication. 2 August 2001 Meeting between the parties – Nil target's hereafter: 547 On 2 August 2001, a meeting took place between representatives of Vodafone and Mobile. There are two file notes which have been taken of the meeting, which emphasise different aspects of it [7/1245; 7/1245A]. 548 The file note prepared by Mr Marchbank [7/1245] made reference to a discussion during the meeting about the effect of changes in the Australian market on the relationship between Mobile and Vodafone. The file note records that Mr Maher was of the view that it was uneconomic to acquire customers at current costs and that in light of this Vodafone was not under an obligation to compete in the direct market. 549 In relation to the question of a nil target, the minutes prepared by Mr Marchbank [7/1245] and those prepared by Mr Shaw [7/1245A] state that Vodafone intended to set a target of zero for the December quarter, and that it was the intention of Vodafone to continue to set zero as a target for the subsequent quarters. One set of minutes records the basis for this decision as follows: "[Maher] stated that for economic reasons Vodafone had elected to target nil connections for the December quarter and pay only the minimum Base Acquisition Margin as required by the contract. (GM's opinion that V was only responsible for BAM was not challenged specifically by JM or CS.)" [7/1245A] 550 Mr Shaw noted in his minutes that Ms Blake stated that: "the nil target at this stage was only for the December quarter but she did not in any way challenge [Maher's] stated views on the contract and its long term viability from V's point of view." [7/1245A] 551 Under cross-examination Mr Maher gave the following evidence on the nil target issue: "Q. And did you say it was your intention to continue to set targets at zero for subsequent quarters because the cost of acquiring customers was prohibitive for Vodafone ? A. Yes, I did . Q. Was that true? A. Yes it was. Q. That it was your intention on behalf of Vodafone to continue to set zero targets for subsequent quarters? A. Until we could work out a profitable way of acquiring customers. Q. You didn't say that, did you? A. Yes, I did. " [Transcript 806] He went on to state: "Q. And did he ask you, Mr Maher, whether you were saying that the entire ASP agreement will no longer be entertained by Vodafone? A. Yes he did. Q. And did you respond, Mr Maher, that for this quarter and every subsequent quarter under this agreement the target will be nil? A. I responded on the basis it would be nil until we can work out a way to make a profit, yes." [Transcript 808] 552 Both file notes record the response of Mr Marchbank to the views expressed by Mr Maher and the decision by Vodafone to set nil target. Mr Marchbank expressed his view at the meeting that Vodafone had an obligation under the ASP to provide Mobile with the ability to grow, and thus the setting of nil targets was outside the operation of the ASP. [7/1245; 7/1245A] 553 The meeting concluded with a statement by Mr Shaw that the only remaining course of action was for Mobile to pursue a legal remedy, but that it remained willing to negotiate a valid alternative in parallel if Vodafone agreed. Maher agreed to participate in a "brain-storming" meeting, subject to his own availability. However, one set of minutes recorded that there was "no prospect of a solution in sight" [7/ 1245B]. 554 Detailed evidence was given about the meeting of 2 August. [See Mr Marchbank 22/5/02 para 140; Mr Shaw 13/2/03 para 6; Mr Maher 19/12/02; para 102; Ms Blake 4/12/02 para 221] 555 To a large extent, the alternative versions of the meeting are consistent with each other and reflect the contemporaneous notes prepared after the meeting. 556 However, there are a few points of contention. In respect of the approach to take in the future following the setting of the nil target, Mr Marchbank gave the following evidence: Mr Marchbank: "So if we come up with some new strategies to acquire customers through a direct model that meets your profitability targets you would not allow us to acquire those customers under the ASP Agreement? Mr Maher: "I doubt very much whether you can do that as I do not believe a direct marketing company is sustainable in this market and even if it was I'd never do it under this agreement." [para 140] [Affidavit 22 May 2002] 557 Mr Maher gave the evidence as follows: Mr Marchbank: "So we have to come up with new ways to make it profitable for you." Mr Maher: "Yes and that will need some different thinking and ideas as the costs of your traditional style of off the page marketing looks to be unsustainable. We still value your ability in direct marketing and customer management. However, the industry has moved on and scale is becoming more critical in reducing customer management costs." [para 102] [Affidavit 19 December 2002] The other major point of contention is whether or not Mr Maher stated that Vodafone was complying with its obligations under the ASP by paying Mobile the minimum BAM, and further, whether Mobile accepted this in principle. The alternative versions are set out below: Mr Maher: "Chris, as we agreed in the original negotiations there is a minimum amount per quarter paid to protect your business. We will pay this and continue to consider other options. " [Affidavit of Mr Maher 19 December 2002] This was denied by Mr Shaw: "10. I refer to paragraph 102 of Mr Maher's affidavit. I have set out my recollection of the conversation held on 2 August 2001 in paragraph 5 above. I deny that Mr Maher said, " Chris, as we agreed in the original negotiations there is a minimum amount per quarter paid to protect your business ". Mr Shaw also gave evidence: "7. I deny that Mr Maher said, "When we negotiated the agreement, it was made absolutely clear that we may need to slow volumes down to suit our business targets" or words to that effect. I deny that Mr Marchbank said, "We accept that you can reduce the targets and pay us a minimum BAM" . [Affidavit 13 February 2003] 558 The evidence of the attendees of the meeting indicate that while the parties were looking to negotiate a way forward, Mr Maher was not going to be available for a few weeks following the meeting. This was of great concern to Mr Marchbank and Mr Shaw. Mr Shaw indicated that Mobile would need to look towards legal remedies. [See Mr Marchbank 22/5/02 para 140; Mr Shaw 13/2/03 para 6; Mr Maher 19/12/02; para 102; Ms Blake 4/12/02 para 221] 559 Importantly both Mr Marchbank's and Mr Shaw's minutes/notes recorded that Mr Maher made it clear that Vodafone's intention was to continue to set targets at nil into the future. Both gave oral evidence to that effect. 560 To the extent that Mr Maher's version differed from that of Mr Marchbank, the evidence of Mr Maher is not accepted as reliable. I note in this regard: · his prevarication when asked about what he had said in terms of an interview with a journalist from the Australian Financial Review [the article was admitted into evidence as Exhibit P3 on a limited basis and not as approving the truth of what is set out in the article. It was admitted as having whatever weight in terms of the court's assessment of the evidence given by Mr Maher, as may be gleaned from it and the fact that he accepted that he had read it]. Mr Maher was first asked whether it was possible that he had said to the journalist that "Vodafone was seeking to sever ties with service provider Mobile Innovations". His answer was that he did not recall. His answer to the more extended question as to whether he had said to the journalist that he was seeking to sever ties with service provider Mobile Innovations with whom there was a ten-year sales agreement including a guaranteed minimum income flow to the listed company, was "No, I didn't". To my mind the probabilities are that he had stated to the journalist some such words as that Vodafone was seeking to sever ties with Mobile; · his implausible denial of knowledge of the $70 million hole; 22 August 2001 561 On 22 August 2001, Vodafone sent a letter to Mobile in relation to the September CTA. Prior to this letter, Mobile had advised Vodafone that it would not be productive to spend all of the marketing budget allocated to the quarter. Accordingly, Vodafone offered to pay the minimum BAM to Mobile if Mobile achieved 4,690 connections for September 2001, rather than 6,700 connections as set out in the approval letter of 20 June 2001: "As detailed in our approval letter dated 20 June 2001, Vodafone agreed as a goodwill gesture to guarantee BAM on 12,000 connections provided MI achieves at least 6,700 connections for the September 2001 quarter. In consideration of MI electing not to spend 100% of the marketing budget made available for the quarter, Vodafone would like to extend a further gesture of goodwill and reduce this target to 4,690. This reduction is in direct relationship to the actual reduced marketing spend to date. Therefore Vodafone will guarantee BAM on 12,000 connections provided MI achieves at least 4,690 connections for the September 2001 quarter." [7/ 1250] 562 Mr Marchbank gave evidence that following receipt of this letter he instructed Mobile's staff to cease further marketing expenditure. [Affidavit para 142] 23 August 2001 563 Mobile responded to Vodafone's letter on 23 August as follows: "Mobile Innovations and Vodafone have not agreed to September CTA. We confirm that given: 1. Vodafone's failure to provide a commercially competitive $15 plan; 2. Vodafone only notified Mobile Innovations that it proposed to change the $15 plan, upon which Mobile Innovations' proposed business plan for the September CTA was premised, on 2 July 2001, after the commencement of that quarter; 3. Vodafone's failure to provide branding guidelines for marketing under the Vodafone Direct brand upon which Mobile Innovations' proposed business plan for the September CTA was premised; and 4. Vodafone's refusal to provide information to enable Mobile Innovations to perform Vodafone's Affinity programmes, upon which Mobile Innovations' proposed business plan for the September CTA was premised, it is unlikely that Mobile Innovations will be able to achieve sufficient connections of New Subscribers in the September CTA to warrant spending the remaining $160,000 of the approved marketing budget. Vodafone is obliged to pay Mobile Innovations BAM on 12,000 connections, provided Mobile Innovations achieves the target determined by Vodafone, pursuant to clause 18.3 of the ASP Agreement. This was not a goodwill gesture. In any event, given Vodafone's failure to provide the necessary elements described above, Mobile Innovations' does not accept that a target of 4,690 new connections for the quarter is reasonable or relative and does not agree to it." [7/ 1252] Mobile comes to the position that it would not need to prepare business plans for the acquisitions of nil customers 564 Mr Stonell recorded at some stage as a consequence of the nil targets being set by Vodafone that Mobile came to the position that it would not need to prepare business plans for the acquisitions of nil customers: "Q. In other words, that the preparation of a CTA schedule or business plan for the December quarter would be an exercise in futility if no customers were required to be connected. That's so, isn't it? A. There would be no customers but obviously overheads we are still incurring relating to the CTA. Q. But there was no need for a business plan to be prepared for the acquisition of zero customers? A. Because we are not acquiring customers, yes. Q. The only issue that would need to be raised, as far as you understood it, back in late 2001, was what one did with overheads that continued; correct? A. Yes. [Transcript 708] 30 August 2001 565 On 30 August 2001, Vodafone sent an e-mail to Mobile, disputing Mobile's claim for the CTA shortfall for the June 2001 quarter. In particular, Vodafone stated that it would not pay the minimum BAM on 12,000 connections, but would only pay the minimum BAM on 10,475 connections, because the target for the quarter was greater than 12,000, in which case, clause 18.3 of the ASP Agreement did not apply [7/1254]. Mobile responded as follows: "With regard to the minimum BAM (clause 18.3): Vodafone determined the target level to be 14,150 connections for the Jun01 quarter then didn't follow through with the marketing initiatives contained in the business plan. By doing this, Vodafone caused M! to only achieve 10,475 connections. The main issues causing the lower level of connections were: 1. MI was discouraged from making connections to the $9 and $11 plans as these plans were uneconomic to Vodafone. Vodafone in fact put caps on these plans so M! wouldn't connect too many customers to them. 2. The $15 plan was not approved during the Jun01 quarter. 3. The "Vodafone Direct" branding guidelines were not approved. 4. There were no affinity programs put in place. From the above you can see that the minimum BAM should be paid to M!" [7/ 1254A]. 18 September 2001 566 Vodafone responded on 18 September 2001 by reiterating that it had fully paid the BAM on 10,475 connections for the June 2001 quarter [7/ 1254A]. 567 A relatively small issue arose thereafter in relation to the December 2001 quarter for the reason that some of the customers who had been targeted in the September quarter were in fact not connected by the end of that quarter. This involved something less than 100 customers. As at 28 September Mobile advised Vodafone that there would be an estimated 350 to 400 customers that would carry through into October. Some further discussion then took place between the parties as to how to best deal with the CTA costs associated with connecting these carry over customers to a maximum of 320. It was suggested by Mobile that rather than preparing a separate worksheet for October leadership simply be included as part of the September CTA adjustments, one reason being because of that stays there was no sort being given within Mobile to the preparation of a CTA worksheet for any part of the December quarter. Apparently the CTA was paid in respect of those carry on over customers without any dispute or issue between the parties, the matter not being of great moment-Vodafone paying Mobile's cost to acquire in respect of those customers without any particular difficulty. [Transcript 709 - 710] 28 September 2001 568 On 28 September 2001, Vodafone sent a letter to Mobile about "[f]uture acquisitions under the ASP Agreement". That letter noted that Mobile had commenced proceedings in the Supreme Court, and indicated that the allegations made in Mobile's claim would be denied. Vodafone confirmed that a representative of Vodafone had visited Mobile on 25 September 2001 and informally presented an overview of the proposed new "No Plans" that Vodafone would be launching on 7 October 2001. In relation to this presentation and the existing relationship between Vodafone and Mobile, Vodafone stated: "In my letter of 23 July 2001 I stated that Vodafone looked forward to reviewing proposals from MI directed towards achieving Vodafone's customer profitability objectives. A similar invitation was made on Vodafone's behalf in a letter dated 15 August 2001 from our solicitors, Henry Davis York, to MI's solicitors, Deacons. Despite these invitations, no proposal has been forthcoming from MI. … Contrary to MI's suggestions, Vodafone has always been and remains desirous of using MI as a channel to market as long as profitable customers can be acquired through MI. To that end I repeat Vodafone's invitation that MI put forward a proposal for acquiring customers which are profitable for Vodafone. From Vodafone's perspective that proposal could relate to the plans currently being sold by MI or to Vodafone's soon to be launched "No Plans". For the avoidance of any doubt, I should point out that Vodafone's decision to set a target of zero connections for the December quarter remains in place until I have expressly confirmed in writing to the contrary. Vodafone awaits receipt of MI's proposal." [8/ 1268] 569 On 28 September 2001, Mobile advised Vodafone that there was an estimated 350-400 connections which would carry over from the September quarter into October. Mobile sought confirmation from Vodafone that it would be paid a CTA in respect of those sales [8/ 1270]. 570 Vodafone confirmed that it would accept a maximum of 320 new connections for the quarter, being 300 sale orders received prior to 1 October 2001 which were currently being processed, and 20 representing new sales made during the first week of October. Vodafone confirmed that a CTA of $505.29 would be paid for each connection [8/ 1274]. 571 Mobile subsequently advised Vodafone that this would be processed in the September CTA calculation, rather than doing a separate CTA calculation in October [8/ 1287]. 5 October 2001 572 On 5 October 2001 Mr Oswald confirmed that Mobile should not be accepting new sales after 1 October for the December quarter. [8/ 1274] 24 October 2001 573 On 24 October 2001 Mr Stonell sent a claim for actual CTA for the quarter, which included redundancy payments and outplacement costs of $310,179 paid to or in respect of about 40 staff made redundant during that period (Stonell 25/6/02 para 98-103; 8/1294-6). The amount of $310,179 has not been paid (Stonell 25/6/02 para 103; 8/1299-1300, 1305). 574 On 24 October 2001, Mobile forwarded a letter to Vodafone, setting out its calculation of the amount claimed for the September 2001 quarter. This claim included a claim for redundancies, and also included a claim for BAM on 12,000 connections. In relation to the BAM calculation, Mobile stated: "As MI was targeted to connect 9,000 connections but only achieved 3,861, MI has built into the BAM calculation $351,361 (43.17 x 12,000 – 3,861) due to the under achievement being caused by Vodafone's inability to provide the tools needed to achieve the target." [8/ 1294] 14 November 2001 575 On 14 November 2001, Mobile made an announcement to ASX, attaching a presentation to be made at the Mobile annual general meeting. That presentation included the following commentary: "Market Conditions • Telco market 'bubble' burst in FY2001. • Share price collapse in Equipment, Carrier and Retail stocks globally. • Market moved from 'volume' focus to 'value' of customer. • One.Tel/World Exchange/Comvergent suffered. • Consolidation occurred. • Vodafone 'stood still'. Internal changes. Lost customers. • MI forced to work at levels below contractual minimum of ASP agreement, with no alternative. • MI forced to initiate legal proceedings." [8/ 1311A] 16 November 2001 576 On 16 November 2001, Vodafone sent a letter to Mobile confirming the annual adjustments to the rates of BAM and CTM payable from 1 October 2001 [8/ 1312]. 20 November 2001 577 On 20 November 2001 Mobile prepared a CTA Schedule+ for the December quarter [8/ 1313]. This was sent under cover of a letter of 20 November 2001 advising as follows: "As a result of Vodafone's breach of the ASP Agreement, by purporting to determine a Nil target of New Subscribers expected to be connected in the December Quarter, Mobile has been forced to take certain steps to mitigate or reduce the damage it is likely to suffer. As your awareness has included large-scale redundancies allows sales staff. However, Mobile is still incurring fixed acquisition costs. Pursuant to clause 17 of the ASP Agreement, Mobile advises Vodafone that Mobile estimates it would incurring a CTA in accordance with the attached Schedule+. This estimated CTA includes the cost of 189 re issues and 21 Isaac connections that have been authorised by Vodafone" 578 This was the first CTA Schedule + that had been prepared in respect of the December quarter. It was different in its method of preparation to the previous CTA worksheets. This CTA worksheets [8/ 1314] included for 21 carryover customers or new connects estimated connection overhead costs of $44,300. Mr Stonell gave the following evidence: "Q. You don't seriously suggest - I withdraw that. If you look at the CTA work sheet on 1314 you have included for these 21 customers estimated connection overhead costs of 44300? A. Yes. Q. And you don't seriously suggest that those overhead connection costs were incurred for the purpose of connecting 21 customers, do you? A. I would say that these costs were costs that we were still incurring in relation to acquiring customers, yes. Q. This document you prepared at 1314 was a document to commence a - I withdraw that. You understood the document at 1314 was to put Mobile Innovations' claim forward to Vodafone for the payment of overhead costs for the December quarter even though a nil target had been set, that's so, isn't it? A. Yes." [Transcript 711] 579 Mr Stonell also gave the following evidence under cross-examination: "Q. You don't seriously suggest that it would be reasonable to allocate a full amount of $100,000 in salaries and wages to the connection of 21 customers, do you? A. The costs I have allocated in this area are costs for, how can you describe it, people who were employed to acquire customers and- an example would be the HR lady; at one stage we had 200 staff members and a large proportion of her time would be spent managing the staff members who acquire customers. Now, you have the situation where we still need a HR lady and a certain amount of her time becomes redundant, same with other people in the business and that time made redundant would have been used for sales purposes and that's what the allocation is. Q. So this $300,000 represents - I assume that the task of connecting 21 customers would not have involved the Mobile Innovations operation staff members working full-time, would it, to have acquired that 21 customers? A. No. Q. And, in fact, if anything, only a very small proportion of the time of those staff members would have been spent acquiring those 21 customers? A. Yes. Q. And a large part of their time they would have simply been idle, is that correct? A. That's correct. Q. So in terms of the actual time spent by any of these people for whom $300,000 is charged on the work sheet is concerned it is not reasonable to allocate the huge proportion of their time spent idle to the acquisition 21 customers, do you agree with that? A. I don't agree it is unreasonable, I think it is very reasonable. Q. The allocation of their idle time to the connection of a minimal number of customers is not something which is a reasonable allocation of overheads, do you agree with that? A. It's not a reasonable allocation - it's a reasonable allocation of an infrastructure which was developed for acquiring customers which still may be idle but has to be run down at some point of time. Q. Your argument is that - Mobile's argument, as you understand it, is that Vodafone had to pay for the operation even though it was doing nothing, is that so? A. For the sales component of the operation, yes. Q. For any of these overhead costs which are referred to on page 1315 you understand the argument of Mobile Innovations is that Vodafone had to pay for those costs whether or not customers were being connected? A. That's right. Q. And you were seeking to advance that particular claim by forwarding the CTA work sheet to Mobile as you did on, advancing the CTA work sheet from Mobile to Vodafone as you did on 20 November 2001? A. Yes. [Transcript 712-713] 580 Mr Stonell gave evidence that no further customers were acquired at any time after the December 2001 quarter. [Transcript 717] However Mobiles still sought from Vodafone, payment of overhead expenses which Mr Stonell described as "idle overhead expenses". 581 Mr Stonell was cross-examined in relation to rent which was continued to be paid by Mobile. The relevant space had been used when Mobile had been acquiring customers. Vodafone made it clear at some stage by the December 2001 that it expected to set nil targets for future quarters. Mr Stonell was asked why Mobile had not taken the step of leasing out the idle office space and his evidence was that had it been leased out, then if Vodafone had decided that they wanted to turn the tap back on, Mobile would not have been able to perform their functions under the ASP. [Transcript 717] 6 December 2001 582 On 6 December 2001, Vodafone responded to Mobile's facsimile of 20 November 2001. Vodafone rejected the claim for the December quarter CTA proposed by Mobile, and made the following observations in relation to the connection overflow from the September quarter to the December quarter: "The September Quarter overflow connections is a separate issue. As the December Quarter approached, MI in effect sought permission to make nominal connections in the December Quarter as a result of an apparently inevitable flow on from MI's activities in the September Quarter. In good faith Vodafone has subsequently engaged in discussions about the size of the overflow and has offered to pay a CTA based on the CTA for the September Quarter. In short, MI represented that it would have to make a small number of connections as a result of MI's acquisition activities up until the beginning of the December Quarter. Vodafone took the view that it would not have been fair to accept these inevitable connections without compensating MI. As the connections related to MI's September Quarter acquisition activities, it seemed fair to offer to pay a cost to acquire based on the September Quarter CTA. I note that these discussions have not concluded and I reiterate the proposal contained in my email of 22 October 2001. The amount of compensation to be paid to MI for the September Quarter overflow connections has nothing to do with any business plan for the December Quarter. By virtue of Vodafone setting a zero target level for the December Quarter, there is no business plan for the December Quarter. What MI is seeking to do is find a reason to invent a business plan in order to make a claim for MI's business costs, for which Vodafone is not liable." [8/ 1317] 583 On 20 February 2002, Mobile sent a letter to Vodafone seeking payment of $66,466.54 for the CTA for the December quarter. This CTA Worksheet disclosed that there were only 16 connections in the December quarter, not 21 as had been estimated. The Worksheet included a claim for $1,000,506 in CTA overhead costs, $69,437 in marketing costs and $530,292 in respect of the minimum BAM [8/ 1321]. 584 On 12 March 2002, Vodafone sent a letter to Mobile in relation to the CTA quarters for March 2002 and June 2002. In that letter, Vodafone stated: "Since the Dec-01 Quarter, Vodafone and MI have been operating on the basis of a nil target level for connection of New Subscribers. In recent correspondence and meetings we have discussed with MI proposals regarding our on-going relationship and future acquisition strategies. The subsequent litigation commenced by MI has weakened communication channels, as has the transfer or redundancies incurred by both companies of employees who were previously dealing with each other. However, Vodafone remains willing to re-open those channels and explore any proposals MI would have in relation to achieving Vodafone's customer profitability strategy. At this point, Vodafone confirms that the target level for connections of New Subscribers is nil for both the March and June 2002 quarters. It is therefore not necessary to prepare and review any estimated CTA for either of these quarters. The target level of nil will continue to apply to these quarters unless otherwise agreed in writing. Vodafone will continue to pay to MI the Base Acquisition Margin in accordance with clause 18.3 of the ASP Agreement." [8/ 1325] 585 Vodafone therefore relies upon this letter in support of its assertion that "it has said and continues to say that it will not set targets other than nil in circumstances where Mobile has not shown and is incapable of showing that it can produce any business of value to Vodafone." [Transcript 72.29] 586 On 25 March 2002, Mobile responded to Vodafone as follows: "I refer to your letter confirming Vodafone's intention to continue to set 'nil' target levels for acquisitions in the March '02 and June '02 quarters. Nil is not a 'target' nor a number within the meaning of the ASP Agreement. Therefore a target has, in effect, not been set for the March and June Quarters. As Vodafone is under an obligation to act, it has not acted, in good faith and reasonably when purporting to set the nil 'target', the determination is invalid and of no effect or if it is of effect, is liable to be set aside. In any event, the effect of the purported determination is that no targets have been set for the March and June Quarters. It is not correct to say that we have had recent meetings regarding your acquisition strategies. Mobile Innovations are completely in the dark about these, and 'Vodafone's customer profitability strategy'. As previously stated, unless you are prepared to give us details of your customer profitability strategy, it is impossible for us to make unilateral proposals that are relevant. Vodafone's conduct has caused Mobile Innovations to make some employees redundant. However, our communication channels remain open and unaffected by any changes in personnel." [8/ 1326] 1 April 2002 587 1 April 2002 - on this date all V Mobile customers transferred to a new plan with a $5 minimum spend. 588 On 26 April 2002, Mobile sent a letter to Vodafone, seeking payment of actual CTA expenses for the March 2002 quarters of $539,407. Mobile explained: "The majority of these costs relate to rental expenses incurred in relation to office space leased by Mobile Innovations to provide acquisition services to Vodafone, a proportion of permanent employees' salaries which employees are employed, amongst other things, to undertake acquisition services under the ASP Agreement, redundancy costs and depreciation of acquisition related assets." [8/ 1329] CTA Worksheets for the June 2002 quarter and the September 2002 quarter 589 The approach taken by Mobile with respect to the June and September 2002 quarter this was to combine the claim under one letter 8/ 1330. [Transcript 722-723] 590 In early July 2002 Mobile sought information from Vodafone in relation to the question of ongoing retention funding, and the CTM payable to Mobile on non-tolling V Mobile customers as a result of the introduction of a $5 monthly access fee for customers on the V Mobile plans [8/ 133OI]. 591 On 30 July 2002, Vodafone replied by advising that all retention fundings would cease after 1 September 2002, although a loyalty credit program would be introduced for all Vodafone customers. In relation to the V Mobile customers, Vodafone proposed that the $5 fee be split on a 50/50 basis with Mobile (this issue is addressed in claim 2 below). Vodafone also advised Mobile in relation to the No Plans product as follows; "The No Plans product is being relaunched in August 2002. Vodafone assumes that Mobile Innovation's position on this product has not changed since the meeting held on 25 September 2001, where Mobile Innovations claimed that this product was not viable under the current ASP Agreement. Please advise us if your position on this has changed, so that we may provide you the product specification document for further discussion." [8/1330I(ii)] 592 There was then further correspondence between Mobile and Vodafone in relation to Vodafone's letter of 30 July 2002 [8/ 1330V, 8/ 1330W]. 593 On 19 November 2002 Vodafone sent a letter to Mobile advising the rate increases for BAM and CTM, in accordance with the ASP Agreement [8/ 1330BW(i)]. 594 On 28 October 2002 Mobile submitted a further CTA claim for the June 2002 quarter and the September 2002 quarter. Mobile described the majority of these costs as relating to rental expenses, a proportion of permanent employees' salaries allocated to acquisition services and depreciation of acquisition related assets [1330Z(xli)]. 595 On 13 January 2003 Vodafone sent a letter to Mobile inviting Mobile to provide Vodafone with the proposed business plan for the June 2003 quarter. That letter suggested a target of 3,000 customers, subject to Mobile's proposal in relation to the estimated costs to acquire. The letter stated: "I refer to previous correspondence between our companies in relation to Vodafone's decision not to acquire customers through MI's direct marketing operations in recent quarters. I have now been provided with a copy of MI's proposed second further amended summons. In particular, I refer to paragraph 39R of that document. The substance of the allegation levelled at Vodafone in that particular paragraph appears to me to be that Vodafone has not invited MI to negotiate a business plan for acquiring customers through MI's direct marketing operations for the quarters since December 2001 and that for this process to commence Vodafone must first set a target level of customers to be acquired. I am sure that it would not surprise you to learn that I do not agree with either of these allegations. However, I do not propose to turn this into a forum for debate on those allegations. The purpose of my corresponding with you is to invite MI to provide Vodafone with a proposed business plan for acquiring customers through MI's direct marketing operations for the June 2003 quarter. As you would be aware, Vodafone's position has been that the costs incurred by Vodafone in acquiring customers through MI's direct marketing operations are unacceptably high. Vodafone has been and remains more than happy to acquire customers through MI's direct marketing operations so long as those customers are acquired at an acceptable cost to Vodafone. You would also be aware that Vodafone no longer offers low value post paid plans which have a contract period and a handset subsidy, the sale of which has traditionally been MI's strength. At the consumer level, Vodafone does not have any product involving a contract period and handset subsidy other than its Business Choice plans. As to an acceptable target level for the quarter, that would very much depend on what MI considers to be an achievable target and, from Vodafone's perspective the estimated cost to acquire. As a guide, I have attached a schedule to this letter, showing Vodafone's usual CTA incurred for connections through MI's dealer channel, Look Mobile, to Business Choice Plans with a contract period. In the event that MI can match or come very close to these acquisition costs when acquiring customers through its direct marketing operations, I expect that Vodafone would be able to agree to a target level of 3,000 customers or more per quarter. On this basis and for the purpose of obtaining a draft CTA worksheet from MI, I suggest that a target level of 3,000 customers for the quarter be used. This suggested target level of 3,000 customers is, of course, subject to MI's views on the matter, including whether that is an achievable target in view of the higher value plans being offered. You may think that MI will not be able to sell that many high value plans in a quarter. Conversely, if MI thinks that it can sell more than 3,000 Business Choice Plans in a quarter and would like higher volumes in order to achieve the CTA's in the attached schedule, then that is a matter which Vodafone would be ready to consider. Vodafone is also prepared to consider providing or agreeing to a long term forecast of quarterly connections, say for a period of up to 12 months, should that become necessary. If there is any further information required by MI in order to be able to prepare a CTA worksheet would you please let me know as soon as possible. Otherwise, I look forward to receiving a draft worksheet." LOOK MOBILE CTA BY PLAN Plan Plan Name Contract Usual CTA Number Term Plan 48 18 $250 Plan 48 18 $400 Plan 48 Business Choice 40 Business Choice 60 Business Choice 100 Business Choice 160 Business Choice 260 Business Choice 360 18 $550 Plan 48 Business Choice 500 18 $700 Plan 48 18 $850 Plan 48 18 $1,000 Plan 48 18 $1,150 596 Mobile did not respond to Vodafone's letter of 13 January 2003. 597 On 29 January 2003 Mobile sent a letter to Vodafone claiming its CTA costs for December 2002 quarter. In addition to costs for rental space, salaries and depreciation, as had been claimed in previous quarters, Mobile included a claim for $200,000 worth of "minimum marketing fees" due to Innovations Direct Pty Limited for the period January to December 2002. Mobile advised that the Marketing agreement had been cancelled on 31 December 2002 [8/ 1330Z(xlviii)]. 598 In the period since Vodafone's letter of 23 July 2001, Mobile has continued to acquire customers through its dealer channel, Look Mobile. The number of customers acquired over this period and the fees paid to Mobile are recorded in Ms Moussa's affidavit [Ms Moussa 6.12.02 para 112; Exhibit at CM.231]. Vodafone's refusal to pay CTA 599 Vodafone refused to pay CTA for the December 2001 quarter (TB1321), the March 2002 quarter (TB1329), the June and September 2002 quarters (TB1330Z(xli)) and the December 2002 quarter (TB1330Z(xlviii)). Marketing Agreement 600 The evidence was that Mobile had included in its claim for quarters following December 2001 an amount of $55,000 payable to Innovations, a company of Mr Shaw. This was payable by reason of a Marketing Agreement between Mobile and Innovations whereunder Innovations provided marketing services, which Agreement provided that if their were no customers connected, a minimum fee of $50,000 per quarter would be payable. [Transcript 717] 601 A Consultancy Agreement had also been entered into which was described in the prospectus at 3/ 441 and 442 as follows: "The Company has entered into a fixed term consultancy agreement with Innovations Holdings for the provision of consultancy services to Mobile by Chris Shaw. The term of the agreement is three years. Under the agreement, Innovations must procure that Chris Shaw provides the same consultancy services to Mobile as were provided during the period before the agreement was entered into. The fees payable to Innovations are initially $204,000 per annum" [3/ 448] Critical Construction issue The Question 602 What has been described as the nil target issue stands at the heart of the dispute. Was there or was there not, whether as part of the proper construction of the ASP or by way of the legitimate implication of a term, any, and if so what, obligation upon Vodafone to: · put forward, in order to gain agreement [as part of an agreed business plan]; or · failing agreement, to determine. by way of a 'target', that a particular positive number of new subscribers was [or alternatively, was reasonably ], expected by it to be connected in the next quarter? 603 In endeavouring to answer this question it is necessary to travel backwards and forwards through the many interrelated and interconnected relevant ASP provisions. However before commencing that examination of the scheme of the ASP and because of the general requirement to treat with the causes of action raising duties to cooperate, good faith and reasonableness, it seems convenient to treat with those matters at the level of principle. The duty to cooperate, good faith and reasonableness causes of action The principles governing implication of terms 604 In State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 [Einstein J] some attention was addressed to an overview of the principles governing implication of terms. The judgment [40] – [46] included: "[40] It is useful to briefly note the categories, or the points along the spectrum, of differing contractual terms (see Liverpool City Council v Irwin [1977] AC 239 at 254 per Lord Wilberforce). [41] In the first category are terms which are to be found expressly in the contractual statements of the parties or documents into which the parties have reduced their agreement. [42] In the second category are to be found terms which are not to be found within the express contractual statements of the parties or the documents in which the agreement is to be found, but which are found aliunde. [43] The second category is subject to a further division: · terms which the law finds in a certain class of contract, either by common law or statute, although those terms may not find specific expression in the contractual statements or documents of the parties. ["category "A" terms"] · terms which are to be implied into a contract to give effect to the presumed intention of the parties: Castlemaine Tooheys Ltd v Carlton and United Breweries Ltd (1987) 10 NSWLR 468 at 486 – 487 per Hope JA, Byrne v Australian Airlines (1995) 185 CLR 411 at 448 per McHugh and Gummow JJ. ["category "B" terms"] [44] Terms which are to be implied into a contract to give effect to the presumed intention of the parties can be further sub-divided as follows.: · terms implied into a contract to give effect to the presumed intention of the parties can be implied according to a notorious custom or usage in a particular trade, industry or locality: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurances (Australia Ltd) (1986) 160 CLR 226 at 236 per Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ. ["category "B(i)" terms"] · terms implied into a contract from a prior course of dealing: McCutcheon v David MacBrayne [1964] 1 WLR 125 at 134 per Lord Devlin, Hardwick Game Farm v Suffolk Agricultural Poultry and Producers Association [1969] 2 AC 31 at 90 per Lord Morris of Borth-y-Gest, at 113 per Lord Pearce. ["category "B (ii)" terms"] · terms implied into certain contracts familiar to courts where the principal terms of the agreement are settled but necessary subsidiary terms are absent: Coal Cliff Collieries v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 38 per Handley JA. ["category "B (iii)" terms"] · terms which are implied to give efficacy to the particular contract: BP Refinery (Westernport Port) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 282 - 283. ["category "B (iv)" terms"] Implication of Terms Ad Hoc [45] The principles upon which a Court will imply a term into a contract as a matter of fact are not in doubt and have been stated and re-stated authoritatively many times. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, the Privy Council, on appeal from the Supreme Court of Victoria, listed the five requirements necessary to be satisfied as follows (at 282 - 283): 'Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying;' (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.' [46] This statement has been approved by the High Court many times: Secured Income Real Estate v St Martin's Investments Pty Ltd (1979) 144 CLR 596 at 605 - 606. Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 66, 117 - 118, Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 441. The onus for showing that the criteria have been satisfied lies on the party that asserts the implied term; that onus is heavier where, as here, the subject contract is a detailed and complex one. In Codelfa Construction Pty Ltd v State Rail Authority of NSW (supra, at 346) Mason J said: '[t]he more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the question of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question .' " 605 The reference in Banabelle [47] to deprivation of benefit becomes of considerable relevance in terms of the issue thrown up in the present case: " Equitable and reasonable [47] Upon the first requirement - reasonableness and equitableness - it is possible to say two things. First, it is clear that such a requirement refers to fairness as between the parties. In Byrne v Australian Airlines Ltd (supra, at 442) McHugh and Gummow JJ rejected the suggested implication because [t]he contractual term propounded by the appellants would operate in a partisan fashion.' Second , it is clear that reasonableness and equity is to be judged by reference to the benefits and burdens each party can expect to enjoy or undertake under the contract. So, in BP Refinery v Shire of Hastings (supra, at 284) the majority of the Privy Council rejected the proposed implication into a rating agreement requiring a continuity of corporate identity on the ground that such an implication would deprive the appellant of a benefit which induced it to make a major capital investment in the defendant's Shire." The implied duty to cooperate in the performance of contractual obligations 606 Banabelle dealt fairly extensively with this implied duty and with sundry parameters of it. Clearly what was there said is here followed. Without repeating all of the relevant propositions there set out I note that the following authorities clearly establish an implied contractual duty to co-operate in the performance of contractual obligations as part of the law of New South Wales: United States Surgical Cooperation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 800 per McLelland J, Beaton v McDivitt (1987) 13 NSWLR 162 at 185 per McHugh JA, Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 at 694 per Giles J, New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68, per Mahoney AP, Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236 at 262 per Einstein J, Hungry Jacks v Burger King [1999] NSWSC 1029, per Rolfe J and on appeal – Burger King Corporation v Hungry Jacks JJA at paragraph 144 [2001] NSWCA 187 per Sheller, Beazley and Stein. 607 The holding in Banabelle was that in the light the authorities, the following compendious statement of the existence of and content of the implied duty to co-operate can be made: "[67] The implied duty to co-operate is a term implied in accordance with the presumed intention of the parties as necessary to give business efficacy to the contract. Depending on the circumstances, the duty may apply so as to prevent one party hindering performance or the occurrence of a condition precedent on which performance depends. Alternatively, it may consist of a duty to take steps to allow the performance of the contract by the other party so as to permit the full realisation of the benefits which the contract contemplates to accrue to that party : see S Stoljar 'Prevention and Co-operation in the Law of Contract' (1953) 31 Can Bar Rev 231 at 232. [68] Where the obligation or benefit is of a fundamental nature such that the relevant party would not have entered into the contract without an assurance of strict or substantial performance of the obligation or an assurance of the benefit or a real and genuine chance to gain the benefit, then the term will be implied as satisfying the test for the implication of terms in fact without further analysis. Where the obligation or benefit is not of a fundamental kind, the proposed implied term must satisfy the five point test enunciated by the Privy Council in BP Refinery (Westenport) v Shire of Hastings - See Secured Income v St Martin's Investment Pty Ltd (supra 607-608 per Mason J). [69] The duty to co-operate is regulated by the requirement that the specified cooperation be reasonable. If such cooperation is reasonable, it is not to the point to say that such cooperation is commercially disadvantageous. However, what is reasonable is to be determined according to the express obligations and benefits contemplated in the subject contract . Cooperation may not be reasonable if it requires one party to assume a risk extraneous to the risk inherently contained in the transaction or to assume burdens excessive with regard to the benefits it could reasonably contemplate under the contract . Reasonable cooperation does not extend to inducing or compelling a third party to perform acts where benefits under the contract depend on those third party acts. Co-operation may also not be reasonable where that co-operation is likely to be utilised by the other party for purposes extraneous to the contract and detrimental to the co-operating party." [Emphasis added] 608 Clearly enough and as the Court of Appeal [Mason P, Beazley and Stein JJA] recognised in Australis Media Holdings v Telstra Corporation (1998) 43 NSWLR 104 at 124: "…there cannot be a duty to co-operate in bringing about something which the contract does not require to happen. An "implication, arising as it does from necessity, must be limited by the extent of the need' : Board of Fire Commissioners (NSW) v Ardouin (1961) 109 CLR 105 at 118,per Kitto J". 609 In E. Peden, 'Good Faith in the Performance of Contracts, Lexis Nexis Butterworths, Australia, 2003 a strong argument is put forward in support of the proposition that the rules of construction provide the underpinning duties of cooperation or good faith: "[6.1] 'Interpretation' describes the process whereby courts determine the meaning of words, and 'construction' describes the process of determining their legal effect. There are well-known 'rules' of construction, such as the main requirement to give effect to the party's intentions, to construe the contract as a whole, and to avoid an unreasonable construction where possible. There are also construction 'presumptions', such as the general presumption that contracting parties intend to enter contracts that operate to produce sensible results, and the presumption that contractual obligations are dependent and not independent. These tenets of construction, it is suggested, are based on a theory of cooperation: courts construe contract on the basis that the parties intended them to work; the various rules of construction flow from this. The courts use good faith or cooperation not only to construe the contract, but also as a basis of implying obligations. Construction, in the interpretation sense, mostly simply provides the meaning of words. This process also goes further. It can explain express terms to give a fuller meaning to their content such as where a term that X must deliver goods can be construed to mean X must deliver goods within a reasonable time. If taken even further, construction can be used to imply terms. This is 'implication by construction', and it is suggested that all these processes are informed by the general principle of good faith. Therefore, the courts construe express terms and the contract as a whole on the basis that the parties intended to behave in good faith and this provides particular solutions to the problems presented by any set of facts. It is therefore a mistake to translate an underlying principle of good faith or cooperation into an implied term, which is then construed and applied. The principle can be applied in construction of express terms to determine their full import. Alternatively, or in addition, the principle of good faith can be applied in construction that results in implying a new term. There is no need to imply in fact or in law a term that the parties should cooperate or acting good faith…" [at pages 113,114] 610 The author having analysed a number of relevant authorities expresses the view that construction is instrumental in explaining many cases which have been labelled as examples of the duty to co-operate. The author then provides reasons for a 'construction' explanation of Mackay v Dick which is said to envisage " that a contract will be construed to determine what obligations the parties have, whether there is any option for the benefit of a particular party and the natural consequences of the various alternative actions of the parties " [6.3][at page 119]. 611 Australis Holdings at 123 includes a careful discussion of the manner in which duties to co-operate can be found express in positive and negative terms: "Sometimes the law will enforce a duty to co-operate in the enjoyment of rights under a contract ;see JF Burrows, "Contractual Cooperation and the Implied Term " (1968) 31 Mod LR 390; Secured Income Real Estate (1979) 144 CLR 596. When it does so, it may declare a "rule of law" attaching to all contracts, such as the rule that one must not derogate from one is grand. Alternatively, the law may imply a term requiring cooperation in certain matters. As we already pointed out, a term implied at law is in effect the recognition of a specific legal incident of all contracts, or all contracts of a particular type. Duties to co-operate are found expressed in positive and negative terms. An example of the former kind is found in Lord Backburn's frequently cited ictum in Mackay v Dick (1881) 6 App Cas 251 at 263. Sterling v Maitland (1864) 5 B& S 840; 122 ER 1043 offers an example of the latter kind…" 612 Professor Carter in the second edition of Breach of Contract, Sweet and Maxwell, London, 1991 [paragraph 235] cites cases which treat positive and negative obligations variously as legal duties created by construction, rules of law or implied terms. As the judgment in Australis Media at 123 reminds us, Professor Carter suggests that the label does not matter. Good Faith 613 As a general proposition, the current state of the law in New South Wales is that there will usually be implied by law into commercial contracts made between parties at arms length, a term requiring the exercise of good faith in the performance of such contracts. Such a term takes its place alongside the implied obligations: · to do all such things as are necessary to enable the other party to have the benefit of the contractual promise; · not to hinder or prevent the fulfilment of the purpose of express promises made in the contract. [ Alcatel Australia Ltd v Scarcella and others (1998) 44 NSWLR 349, Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187] 614 The recent decision of the New South Wales Court of Appeal in Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 includes some particular focus upon the implied term of reasonableness, making the point that the Australian authorities make no distinction of substance between that term and the implied term of good faith. The close association of ideas between the terms 'unreasonableness', 'lack of good faith' and 'unconscionability' is emphasised in Burger King at para 170 and para 171 where the judgment of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263 and 265 is cited. 615 In Burger King, the Court said at paragraph 171: 'Rolfe J observed that in Alcatel, Sheller JA at 369 appeared to equate the notions of "reasonableness" and "good faith". Whilst Sheller JA did not say that in terms, his review of the case law and academic and extra-judicial writings on the topic, clearly support the proposition." 616 The nature and extent of the duty was recently considered by Barrett J in Overlook v Foxtel [2002] NSWSC 17: "[63] But what are the content and effect of such an implied term? This question was the subject of discussion by the Court of Appeal in Burger King. Sheller, Beazley and Stein JJA referred to the observation of Sir Anthony Mason in his 1993 Cambridge Lecture (see now (2000) 116 LQR 66 at 69) that the concept "embraced no less than three related notions", being: "(1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); (2) compliance with honest standards of conduct; and (3) compliance with standards of conduct which are reasonable having regard to the interests of the parties." [64] There is some overlap here with the terms implied by law as referred to in Peters (WA) Ltd. Sir Anthony's duty of "loyalty to the promise itself" may well include the duties not to hinder fulfilment of the promise's purpose and to do everything necessary to enable the other party to have the benefit of the promise. The more substantial and separate content of the duty of good faith itself would therefore seem to lie in the second and third limbs of Sir Anthony's formulation - that is, adherence to standards of conduct which are honest, as well as being reasonable having regard to the parties' interests. [65] If adherence to such standards of conduct is the predominant component of a separate obligation of good faith in performance of a contract, it becomes necessary to enquire about the extent to which selflessness is required. It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become), in words used by McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995) 185 CLR 410, "nugatory, worthless or, perhaps, seriously undermined". This seems to me to be the principle emerging from para 172 to para 177 of the joint judgment in Burger King where the various authorities are collected and discussed. [66} Dr Elisabeth Peden of the University of Sydney has characterised the effect of the good faith requirement in contractual performance as follows ("Incorporation of Terms of Good Faith in Contract Law in Australia", (2001) 23 Syd L Rev 222): "Most basically, by using the obligation to perform in good faith as a principle of construction the courts are merely required to ensure that the parties have genuinely adhered to the bargain which they entered into. This will require an examination of the whole contract and the underlying intentions. Strict rights may not be adhered to, if in the context of the contract as a whole, this would subvert the character of the contract. Most cases that discuss the concept do so in terms of negatives, that is, what is not in breach of good faith. This makes sense, since it is the context of the contract read as a whole that will indicate what is appropriate and what is not." [67] Viewed in this way, the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary: Burger King at para 187. The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms. [68] In many ways, the implied obligation of good faith is best regarded as an obligation to eschew bad faith. This is borne out by the following succinct statement by Lord Scott of Foscote in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170, a case concerning the duty of good faith in the insurance context: "Unless the assured has acted in bad faith, he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise." [69] The approach which regards a duty of good faith as a duty to eschew bad faith is also supported by United States jurisprudence to which resort may appropriately be had: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King at para 147ff. Writing in 1968, Professor Summers described the duty of good faith imposed by the United States Uniform Commercial Code as an "excluder": R S Summers, "Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code", (1968) 54 Va L Rev 195. Its operation and effect were stated as follows: "It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range of heterogeneous forms of bad faith. In a particular context the phrase takes on specific meaning, but usually this is only by way of contrast with the specific form of bad faith actually or hypothetically ruled out." [70] In Tymshare Inc v Covell 727 F2d 1145 (1984), Scalia J concluded that: "The doctrine of good faith performance is a means of finding within a contract an implied obligation not to engage in the particular form of conduct which, in the case at hand, constitutes 'bad faith'." [71] Scalia J went on to say that the contract itself will indicate the content of the duty in the sense that it is imbued or infused with the obligation not to engage in particular conduct." 617 An important consideration, as Barrett J held in Overlook v Foxtel, is that the implied duty of good faith does not require a party to subordinate its contractual rights. The scheme of the ASP 618 The scheme of the ASP appears clearly to have been that Vodafone: · would have the sole discretion to determine from time to time, the target level in respect of the number of connections of new subscribers; · would carry out that determination in conjunction with the determination of the quarterly business Plan. 619 Equally clearly the parties expressly agreed: · to use their best endeavours within one month prior to commencement of the relevant quarter, to agree a business plan for the quarter [clause 21.1]; · that in the event that they would fail to so agree on such a business plan, that the business plan for the three months prior to the relevant quarter would apply [clause 21.2]; · that in the event that they would fail to agree on a business plan not less than seven days before the commencement of the relevant three month period, that failure to reach agreement would constitute a dispute [clause 21.3]; and · that the dispute resolution procedures were to exclude any disagreement between the parties related to, concerning or arising inter alia, from any exercise by Vodafone of any discretion given to it under the ASP [Clause 32.6 (d)] 620 To construe the ASP as obliging Vodafone to determine that a particular positive number of new subscribers ["target"] were reasonably expected by it to be connected in the next quarter raises the difficulty which inheres in the lack of an express criterion [and the concomitant inability of a court to select such a criterion] to be used as a yardstick by which to measure the reasonableness of any particular such target number as may be put forward. 621 Vodafone submits that both the objective background facts, matters and circumstances in which the ASP came to be executed as well as the express terms of the Agreement can be seen to justify an inference that the parties were content to leave the question of the determination of a particular target to the absolute and unfettered discretion of Vodafone, which would presumably be exercised by reference to its commercial interests [or its legitimate commercial interests, as senior counsel for Vodafone was prepared to accept: Transcript 94.10]. Benchmark provisions 622 It is important it seems to me, to bear in mind the provisions concerning the setting and the amendment of benchmarks which are defined as "minimum performance standards" [clause 11.1 et seq; Schedule 1]. 623 Clause 11.1 (a) provided that as at the effective date, the benchmarks were as set out in Schedule 1. Clause 11.1 (b) provided as follows: "Vodafone must review not less often than annually and, if appropriate, amend, replace or add to the benchmarks subject to [Mobile's] consent, which must not be unreasonably withheld. Any amendment, replacement or addition of a benchmark must be reasonable having regard to industry standards, Vodafone's experience in the mobile telecommunications industry in Australia and market and economic conditions". 624 Schedule 1 details what would comprise "first level breaches" and "second level breaches" in terms of three subject matters namely: · churn · net connections · gross connections 625 The initial benchmark with respect to net connections stipulated for: · a first level breach as deemed to occur if net connections were less than 6000 connections per quarter; · a second level breach as deemed to occur in the event of: (a) net connections per quarter of less than 3000 and [Mobile] failed to take measures which Vodafone considered satisfactory to increase net connections above that level within 14 days of the date on which Vodafone notified Mobile of its requirement that Mobile do so; or (b) net connections per quarter of less than 3000 on more than one occasion during any six-month period. 626 The initial benchmark with respect to gross connections stipulated for.. 627 Each of the subclauses of Schedule 1 follow the same format in providing as follows: "A first level breach or second level breach (as the case may be) will not be deemed to occur if Vodafone has determined, in accordance with clause 18.4, that the target level in respect of the number of new subscribers is less than the number of connections comprising a first level breach or a second level breach (as set out above)." 628 This meant as it seems to me, that the parties had been content to identify the setting of benchmarks as at least part of the mechanism by which Vodafone would be entitled to regulate what was to be required of Mobile. Very significantly and as already mentioned, clause 7.1 (b) imposed an obligation on Vodafone in amending, replacing or adding to benchmarks, to act reasonably "having regard to industry standards, Vodafone's experience in the mobile telecommunications industry in Australia and market and economic conditions." 629 The proposition for which Vodafone contends [praying heavily in aid both the terms of clause 18.4: "sole discretion", as well as the suggested width of the absolute discretion provided for in clause 41], is that another part of the mechanism [that is the fixing of targets], permitted it without reference to any similar requirement [to act reasonably generally or in relation to the above described standards, its experience, market or economic conditions], to fix such targets by reference only to its own interests or legitimate commercial interests. Indeed one may imagine an argument that Vodafone was entitled of the fix such targets at its whim. 630 The whole of the scheme is curious to say the least. Instance for example following: · Mobile is expressly required to satisfy each benchmark during the term ["Mobile must satisfy each benchmark…"] [clause 11.2 (a)]; · Upon the mediation provisions being enlivened [clause 11.3(b)], the mediators role included an obligation to assist the parties to isolate the cause of Mobile's failure to perform the benchmark in respect of which the relevant breach had occurred [Clause11.4 (e)(i); · In the event that Mobile fails to satisfy a benchmark, these provisions : - oblige Mobile to immediately notify Vodafone of that failure, providing details of the steps which Mobile proposes to take to ensure that the benchmark is satisfied [clause 11.2 (b) (i); - entitle Vodafone to give notice to Mobile requiring it to take immediate steps to satisfy that benchmark [clause 11.2 (b) (ii). · a reasonably rigorous set of provisions regulates failure to meet benchmarks [clauses 11.3 (a) and (b); · These provisions [clause 11.3 (a)] in the case of a first level breach: - require representatives of the parties to meet to review the part of Mobile's operation relevant to the benchmark in respect of which the breaches occurred; - entitle Vodafone to require that Mobile retain a Vodafone nominee to examine Mobile's business and to report to Vodafone and Mobile on ways of ensuring that Mobile satisfy each benchmark; - require Mobile within five business days after receipt of such report to give Vodafone a written plan detailing steps it intends to implement which I designed to ensure that the benchmark is satisfied; - entitle Vodafone, if such breach continues for a further three months, by notice to require that Mobile implement a Vodafone plan; - provide that a failure by Mobile to comply with such a Vodafone plan will be a breach of the Agreement. · These provisions in the case of a second level breach provide that unless schedule 1 provides otherwise, in the case of such a breach, Vodafone may give notice to Mobile that it intends to refer the matter to mediation. [In fact schedule 1 does provide otherwise in terms of second level breaches in respect of net connections and gross connections. It provides that clause 11.3 (b) does not apply to such second level breaches]. Schedule 1 goes on to provide that if second level breaches are deemed to occur in respect of net connections or gross connections Vodafone is no longer constrained [see clause 2.7 of the ASP] to avoid dealing directly or indirectly with any new service provider or any existing service provider which is a group member, which conducts a Mobile direct marketing operation in competition with Mobile. Schedule 1 expressly provides that Vodafone will be entitled to deal with any person notwithstanding clause 2.7. This is certainly a critical parameter in terms of the consideration which Mobile may be regarded as having contracted for. A major benefit to it was clearly provided by the anti competition clause 2.7. 631 The scheme of the provisions then serves to ameliorate matters in terms of what would otherwise have been a first level breach or a second level breach. This amelioration which removes the label "first level or second level breach", takes place should Vodafone have determined (in accordance with clause 18.4), that the target level in respect of the number of new subscribers is less than the number of connections expressly provided for in the benchmarks for net connections and for gross connections. 632 Interestingly Schedule 1 provides that net connections as well as gross connections are to be reviewed by the parties on a monthly basis. 633 What then does all this amount to? Many questions are raised. Best endeavours 634 Perhaps somewhat curiously one does not outside of clause 12.3, find any express obligation that Mobile carry out its best endeavours to achieve such target as may be set by Vodafone. Clause 12.3 does serve to indicate the intent behind the key performance indicators [defined as meaning the target performance standards set out in schedule 1 or as amended]. Such indicators are intended to reward genuine improvements to levels above and to discourage performance at levels below. 635 There is further an express obligation that Vodafone throughout the term use its best endeavours to promote the Mobile Services, subject to Vodafone's reasonable directions from time to time [clause 13.1 (a)]. Further Mobile expressly agrees not to do anything which would reasonably be regarded as inconsistent with this obligation. Business plans 636 One such question concerns the apparent Agreement [clauses 21.1, 21.2] that in the event of the parties being unable to agree a business plan for the ensuing quarter [and to so agree within one month prior to commencement of that quarter] the business plan for the three months prior to the relevant quarter would apply to the ensuing quarter. But clause 21.2 then seems to conflict with clause 21.3, or at the least would seem to require that these two subclauses be reconciled in that, perhaps the business plan for the three months prior to the relevant quarter would apply to such point in time as the dispute resolution procedure being invoked would lead to a decision on the point in issue. 637 If one focuses upon the benchmarks with respect to net connections and posits a circumstance in which: · Vodafone has determined in accordance with clause 18.4 that the number of new subscribers for a defined quarter is to be 2000; · Vodafone endeavours to reach agreement with Mobile on an appropriate business plan for the ensuing quarter which by Agreement or by expert determination comes into place; clearly enough no second level breach is deemed to occur. 638 What this seems to amount to is no more and no less than that the agreement is seen to be working and the mechanisms built within it seem to have operated. The provisions with respect to seeking to gaining agreement as part of an agreed business plan, or failing agreement, permitting Vodafone to itself determine the target, seem to have in a sense been honoured. Nil target and nil business plan 639 What if one focuses upon the benchmarks with respect to net connections and posits circumstances in which Vodafone either gives a target figure of nil [or does what may seem to be virtually the same, by simply point-blank refusing to give any target figure at all]. It is appropriate to note here an important finding of fact in this case which is that it is clear from the evidence that Vodafone, in either setting nil targets or refusing to set any targets, did so in an environment in which it eschewed any participation by itself in the setting of business plans. What it did was to say to Mobile that until Mobile came up with and put forward for consideration by Vodafone, business plans which may then satisfy Vodafone, Vodafone was simply not going to do anything in relation to discussion of or working into some form of production of business plans. [The point may be best made by looking at a letter from Vodafone to Mobile [8/1330 Z (XXXiii) written on 13 January 2003 only weeks before the commencement of the hearing in which lip service was given to every form of conciliatory approach possible-offering target numbers and suggesting utility in Mobile considering relevant parameters and then communicating them to Vodafone and indicating that Vodafone would then consider Mobile's suggestions and possibly put them into force. Nothing remotely akin to this letter had come forward from Vodafone during the earlier period from the occasion when the nil targets were set and thereafter when no targets were given. The letter, albeit written too late, and which I infer was obviously written on legal advice and was received at a time when Mobile could not deal with it as its relevant marketing infrastructure had been dissembled, had it been a genuine new deal from the Vodafone camp, would clearly represent a 180 degree turn from Vodafone's stance taken during the period from when nil targets had first been set. The matter is dealt in the judgment in terms of the parties legal rights in relation to the letter. The point sought to be made is that the stance of refusing to set a target and of so refusing at the same time as holding Mobile to ransom unless it produced business plans clearly did represent a repudiation of the ASP and a breach of a fundamental term of the ASP.] 640 This attitude and approach [of simply passing the baton (in terms of you produce business plans and show them to us) and 'you never know but we may then even consider producing a target'], as well as the substantial body of evidence that Vodafone indicated that it had had enough of Mobile, represented the significant breach of the ASP. The ASP did not require Mobile, where no targets at all were given, to work on and produce draft business plans for Mobile's consideration in the hope that such draft business plans may bring forward a target determination from Mobile. 641 It is extraordinarily difficult as one follows for example the close evidence given concerning the events of 2001 to follow with precision the moving pattern of stances taken by the parties on a micro basis. What does come through however quite clearly and represents the courts finding of fact is that Vodafone made a clear and conscious and very deliberate decision that it was not able to and did not wish to continue with Mobile as its direct marketing agent or with the ASP and would proceed to force the issue in some fashion by using its entitlement to set the targets as a weapon in this regard. It determined to and in fact then set about what is shown to have been an initially somewhat vacillating set of directions and changes, [Mr Clubb: "Due to the integration of Vodac and Vodafone Network we are in a hell of a mess"] [never taking into account, Mobiles legitimate interest in its own financial survival or ability to continue in business as direct marketing agent whilst fettered by Vodafone's changing reduction of target levels down to zero], but ultimately resolving into a very clear position. This position involved first dramatically reducing previously agreed upon proposed target levels for certain quarters and in due course resulted in purporting to fix a target for a 12 month period instead of for a quarterly period, which target in any event was for such a low number of acquisitions as made it quite plain to Vodafone that Mobile could never survive if obliged to comply with such direction. The sequence of events simply involved a closing of the tap by Vodafone. I reject the proposition that Vodafone is shown on the evidence to have made clear that if and when Mobile might come forward with suggested business plans which would find favour with Vodafone, Vodafone would re-open the tap and return to the ASP template of setting targets and agreeing business plans and the like. Whilst Vodafone or some of its officers may have had in the back of their mind that commercial realities would surely in due course require Mobile to put up high-value business plans [as a matter of having its back to a wall and therefore no longer having any choice], this was not made explicit to Mobile. Mobile was entitled to conduct itself on the basis that Vodafone had and continued to repudiate the ASP. Further, Vodafone was obliged to determine the target in conjunction with the determination of the business plan[s]. Mobile was entitled to invoke the dispute procedures in the event of any failure by the parties acting in good faith to agree upon the business plans. In that event the dispute resolution procedures could be invoked by Mobile and when and if invoked, authorised the Expert to provide a conclusive, final and binding decision in relation to the matter. In determining the targets at nil, Vodafone walked away from such obligation as there was to endeavour to agree upon business plans. Mobile was denied the entitlement to have the expert resolution procedure operate in terms of the matter of selection of business plans. This walking away from its relevant obligations most clearly exhibits a repudiation and breach thereof when one looks at Vodafone's decision [Vodafone's letter of 7 March 2001 (6/ 775)] to set a yearly target instead of a quarterly target, which decision, setting a 12,000 target for the year 1 April 2001 to 31 March 2002, on examination, meant that at one in the same point in time, Vodafone was announcing that Mobile would have no targets at all for the September, December 2001 quarters and for the March 2002 quarter. Ms Blake conceded in cross-examination, that Mobile was being given no targets at all for the following September, December and March quarters. This decision clearly flew in the face of the ASP, setting at naught [a somewhat apt word to use in these circumstances], Mobile's clear contractual entitlement so long as the ASP remained on foot, to have Vodafone exercise a discretion during the month prior to the commencement of the relevant quarter, as to what target was to be set for that quarter. Vodafone blatantly and deliberately breached its obligation to exercise that discretion during the period of time stipulated for that exercise by the ASP. 642 That Vodafone approached the contract and business relationship in this way is simply a finding of fact. The reasons for it seem to have been shown to be a continuing anxiety to reduce the acquisitions on low-level plans for financial reasons. 643 What one now has, as it seems to me, is a circumstance in which the mechanisms provided for in the agreement can be seen not to be working. Mobile continues to be bound by the suite of obligations expressly requiring it to satisfy each benchmark during the term [importantly it should not be forgotten that "benchmarks" are defined in the ASP as "minimum performance standards" At the same time it is appropriate to point out that there must have been a reason why the ASP obliged Vodafone to review not less than annually, and as appropriate to amend, replace or add to the benchmarks. This must surely reinforce the significance of the benchmarks to the parties as minimum performance standards.] Mobile is however saved from having the appellation "first level breach" or "second level breach" applied to its relevant conduct. 644 Gross connections are new connections. How then is Mobile expected to achieve a minimum performance standard apropos gross connections of more than 3000/month (ie 9000/quarter) [1st level breach provision] or 2000/month (ie 6000/quarter) [2nd level breach provision], in a situation where it has been effectively directed by Vodafone not to achieve any new connections at all? And how, in that circumstance, can Mobile continue to discharge its express obligation to use its best endeavours to promote the Mobile Services, subject to Vodafone's reasonable directions from time to time [clause 13.1 (a)]. Possibly this simply raises a question of whether or not the nil level target determination constitutes a reasonable direction in the circumstances. 645 The same point may be made with respect to net connections. How is Mobile to be expected to achieve quarterly net connections of more than 3000 [2nd level breach provision] or 6000 [1st level breach provision], in a situation where it has been effectively directed by Vodafone not to achieve any new connections at all? By definition net connections comprise the cumulative result when old connections churn away and new connections are acquired. If Mobile is obliged not to seek any new connections, then if any churn takes place there will be no net connections. So by definition Mobile cannot, by reason of Vodafone's nil target determination [or failure to give any target], both comply with the minimum performance standard and at the same time also comply with its obligation to work towards achieving Vodafone's identified target. Estimated and Actual Acquisition Costs 646 The defendant's senior counsel, Mr Bathurst QC, paid close attention to clauses 17.6 and 17.7 dealing with differences and variations between Estimated Acquisition Costs and Actual Acquisition Costs. The proposition was that: · there is no constraint in the ASP on Mobile continuing to obtain subscribers even if a target of nil has been set by Vodafone; · applying clause 17.6, if the Actual Acquisition Costs are, subject to clause 17.7, more than the Estimated Acquisition Cost for that quarter, Vodafone must pay the difference to Mobile; · subject to the matters provided for in clause 17.7, if the Estimated Acquisition Costs are zero and Mobile acquires one or more subscribers, as a matter of logic the Actual Acquisition Costs will be more than the Estimated Acquisition Costs and Mobile has an entitlement to receive payment for the actual acquisition Costs. 647 If Vodafone's submission in this regard is correct it seems to me that it is particularly important to note that clause 17.7 (a) provides an express positive obligation upon Mobile to use its best endeavours to ensure that the Actual Acquisition Cost for a quarter correspond to the Estimated Acquisition Cost for that quarter as closely as possible. Hence if Vodafone, assuming an entitlement to do so, determines a nil target for any quarter, clause 17.7 (a) in fact imposes a positive obligation upon Mobile not to incur any Actual Acquisition Costs at all during that quarter. 648 It may also be arguable that where one is dealing with a target level of zero then as a matter of semantics, there will be no Estimated Acquisition Cost at all [as compared to an estimated acquisition cost of zero] for the relevant quarter. 649 There is another dimension to Actual Acquisition Costs which the plaintiff seeks to emphasise. This concerns very close reading of how the actual acquisition cost is derived in support of the proposition that, following the relevant provisions, if there was only one new subscriber, the cost to connect of that subscriber would be the title of the relevant overheads. The matter was explained by Mobile's leading counsel [Transcript 1137-1138] by reference to PX volume 1, generally as follows: · the definition of "actual acquisition costs" is important, not only for assessment and quantum matters, but in the definition of acquisition, actual acquisition costs; · the agreement provides that it is all actual, direct and indirect costs incurred in providing the acquisition services as derived and set out in schedule 3, but subject to adjustment in accordance with clause 17 and including without limitation all merchant fees charged to merchants by companies or other entities providing credit card or charge card facilities other than the merchant charges but excluding any costs associated with Mobile's business other than the Mobile Direct marketing operation; · the following matters can therefore be observed about the scheme. The first is that it is all costs. Secondly, it is direct and indirect. Thirdly, they are derived as set out in schedule three; · now, schedule three is to be found on page 198. This is important because, it describes how the actual acquisition cost is derived and it uses the actual March 98 revenues as a working example. The terms capitalised below as are used in the working example. Mobile splits its total overhead costs, i.e., operating expenses, depreciation and provisions between recurring corporate and connection overhead; · the current percentage split is based on the current resource allocation of the three areas showing, as per the example on page one of two, the total cost to connect overhead calculated at $51.10. [cf page 199 in the right hand column].The cost to connect overhead includes a percentage of administration, annual and long service leave, audit and accounting fees, employee's entertainment, rent, salaries and wages, staff recruitment training and superannuation, telephones; and your Honour will see in the second to right column the percentages in this example which were allocated for the cost to connect; · so what the annexure then says is the resulting total cost to connect overhead per new subscriber, i.e. 51, is transferred to annexure C on page two of two and is deducted from the gross margin per new subscriber. [cf page 200]. Then it says a narrative has been included to describe what is included in each line item and the second column divides the actual cost by the number of new subscribers in the month. The result is the average actual acquisition cost per new subscriber; · the third column mirrors the second except it excludes existing Vodafone support. This support ceases on termination of the service provider agreement; · the resulting gross margin, excluding Vodafone support, is the total cost to connect overhead per new subscriber which will result in the acquisition cost per new subscriber. In this example the actual acquisition cost is $415.03 per new subscriber. How that is derived is seen on the right hand column on page 200; and · if a target had been set of just one subscriber, the cost to connect of that subscriber would be the total of the overhead in column three, in effect, because it would be divided by one. The new connections here had 4232. Page 199, about point seven, shows that this assumes 4232 connections resulting in the cost per new connection of 46.76. If one had only one new connection the cost per new connection would be 197,870. Resolving these disparate internal conflicts 650 The basic approach to the proper construction of a written contract has often been stated but it bears repeating. Objectivity 651 The general test of objectivity is pervasive in the law of contract. Two passages from speeches of Lord Diplock illustrate the point (as Gleeson CJ said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549). 652 In Gissing v Gissing [1971] AC 886, his Lordship said: 'As in so many branches of English Law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party's words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party.' 653 In Ashington Piggeries v Christopher Hill [1972] AC 441 at 502, his Lordship said: 'In each of the instant appeals the dispute is as to what seller promised to the buyer by the words which he used in the contract itself and by his conduct in the course of the negotiations which led up to the contract. What he promised is determined by ascertaining what his words and his conduct would have led the buyer reasonably to believe that he was promising. That is what is meant in the English Law of contract by the common intention of the parties. The test is impersonal. It does not depend upon what the seller himself thought he was promising, if the words and conduct by which he communicated his intention to the seller would have led a reasonable man in the position of the buyer to a different belief as to the promise; nor does it depend upon the actual belief of the buyer himself as to what the seller's promise was, unless that belief would have been shared by a reasonable man in the position of the buyer. The result of the application of this test to the words themselves used in the contract is still "the construction of the contract".' Matrix of circumstances 654 To my mind it may be regarded as having been clear to both parties at the time entering into the ASP that changing economic or market conditions may lead to changes in both volume and margins. Commercial contract 655 The court is dealing with a commercial contract. In construing the meaning of a term the Court will strive to give the agreement a commercial, reasonable and rational operation: Australian Broadcasting Commission v Australian Performing Right Association (1972) 129 CLR 99 at 109; Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310. 656 There is abundant authority that "court should be astute to adopt a construction which will preserve the validity of the contract", per Mason J, Meehan v Jones (1982) 149 CLR 571 at 529; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 132, per Kirby P. Further the court will strive in dealing with a commercial contract to discern the objective intent of the business relationship or other parameters of such contract in order to give effect to f that which the parties may be seen to have bargained for. But always it is to the words of the contract that the court must attend looking in that regard to the whole of the contract to discern the parties intent. Where mechanical provisions intended to operate over an extended period of time are concerned the court endeavours to follow the mechanics and provisions expressed in the contract in the endeavour to follow, always by looking at the manner in which the matter is expressed, how the parties saw the contract as a working guide to the way forward. As pointed out in Biotechnology at 135, the court will however not be in a position to in effect spell out that which the parties have for themselves failed to agree upon. Nor will court be no position to clarify that which is irremediably obscure. Nor will court accept for itself a discretion which the parties have, by their agreement, reserved to one or other of them. To do so would not be to give effect to the contract but to change it: Kofi-Sunkersette Obu v A Strauss & Co Ltd [1951] AC 243 at 250 ( PC). Implied terms 657 The above general description of the disparate difficulties in construing the ASP in the face of a number of apparent internal conflicting provisions serves it seems to me to require one to stand back from the agreement in an attempt to discern from the words of the document, what the parties were apparently intent upon achieving in their relationship. That the contract was a long-term contract is obvious. Each of the parties had a clear commercial interest in entering into the ASP. But above and beyond every other consideration they were about setting out a mode in which Mobile could conduct the agency business which it was appointed to conduct. That was intended to be an ongoing business until the ASP was duly terminated according to its terms or according to the respective legal rights of the parties. The business concerned direct marketing. Mobile was prevented from conducting the Mobile Direct Marketing Operation part of its business otherwise than for Vodafone. [ASP clause 2.2] Hence the parties anticipated that over sundry periods of time, advertising of high order would lead to incoming applications for subscriptions to the services being sold. 658 It seems to me that the parties careful attempts to treat with the need to regularly, as each quarter approached, co-operatively work towards agreeing the terms of the business plans which would apply in respect of that quarter [attempts replete with the alternative dispute resolution provisions should these attempts proved unsuccessful], make plain that neither of them intended that at any stage either party would have an entitlement to simply refuse to participate in the production of any form of business plan at all. But by definition Vodafone's case of an entitlement to set the target at nil is predicated upon, proposition or carries as a correlative to the reasoning underpinning that case, just such a proposition. Its case suggests something which sounds illogical, namely that the proper construction of the ASP can be seen to have entitled Mobile, notwithstanding that Vodafone would set a nil target for an ensuing quarter, to nevertheless: · go ahead and seek as many subscribers as it wished; · be paid its Acquisition Costs in respect of each of those subscribers. 659 There was of course the express general obligation upon Mobile to carry out its best endeavours to promote the Mobile Services. Let us assume that a call came in from a would-be subscriber during a quarter in respect of which Vodafone had fixed a nil target and had concomitantly, not participated in the preparation of any business plan [for the reason which Mr Bathurst forward as there not being anything which could be included on such a plan]. One wonders in that circumstance just what would or could be the content of Mobile's obligation to carry out its best endeavours to promote the mobile services The construction for which Vodafone contends would seem to suggest that Mobile should either attempt to dissuade that would-be subscriber from subscribing to the service or alternatively, perhaps, that Mobile should endeavour to locate an existing subscriber and persuade that subscriber to churn, so that, in net terms, there would be a nil figure for new subscribers. 660 Likewise it seems to be a particularly awkward approach to the ASP to contemplate that in the face of a nil target determination [and concomitant absence of a business plan], the parties should be seen to have intended that Mobile had carte blanch to sign up as many subscribers as it wished, being paid all of its Actual Acquisition Costs in this regard. Were this to occur then clearly that which Vodafone, with its absolute discretion to determine target levels may be suggested as having bargained for, would be completely outflanked. 661 Certainly I recognise that the problem in rejecting the Vodafone construction to the nil target issue inheres in one or more of a combination of: · the lack of an express criterion to be used as a yardstick by which to measure the reasonableness of any particular target number as may be put forward; and · the clarity of the provision within Schedule 1 which expressly recognises that Vodafone may determine, in accordance with clause 18.4, that the target level in respect of new subscribers, would be less than the number of connections comprising either a first level breach or a second level breach. 662 I am less impressed by the Vodafone submission relying upon the proposition than Mobile would [cf clause 17.6 (b)] still be entitled to receive its Actual Acquisition Costs notwithstanding that it may have virtually ignored the target set and simply gone about obtaining as many new subscribers as possible. This is because clause 17.6 (b) is expressly subject to clause 17.7 which latter clause, by subclause (a), obliges Mobile to use its best endeavours to ensure that the Actual Acquisition Cost for a Quarter correspond to the Estimated Acquisition Cost for that quarter as closely as possible. Hence it seems to me that as soon as Mobile would ignore the target in this way and obtain new subscribers at will and proceed to claim the whole of its Actual Acquisition Cost [on the basis that there had been an estimated Acquisition Cost of zero], Vodafone could legitimately assert that Mobile, by breaching clause 17.7 (a), had forfeited any entitlement which it otherwise may have had pursuant to clause 17.6 (b). 663 Clearly one would not expect to obtain and generally cannot obtain any real assistance from decided cases for the reason that this is a contractual issue to be determined as a matter of construction of the ASP. It is interesting however to observe that in The Eastern Extension Ausralasia and China Telegraph Co Ltd v The Commonwealth (1908) 6 CLR 647 a question arose in relation to agreements made between a telegraph company which had laid a telegraph cable between Tasmania and Victoria and the Tasmanian Government to whose rights under the agreements, the Commonwealth had succeeded. The company was given a monopoly of submarine telegraph communication between those States for a fixed period, a scale of charges having been fixed for the transmission of telegrams and it being provided that a particular subsidy should be paid by the Government on an annual basis. It was also provided that the government should have "full power at any time to reduce" the scale of charges for telegrams, that in each year the company should be entitled to take "the whole of the proportion of the moneys collected and receivable by them from all sources in respect of such telegrams," called "message receipts," and that "if, after any such reduction in the scale of charges, the message receipts shall not in any year… by reason of such reduction, or otherwise, amount to the sum of £5600, the Government shall guarantee and pay to the Telegraph Co, the difference between the message receipts and the said sum of £5600" . 664 The Commonwealth, after a previous reduction, purported to abolish the rates altogether. The judgment of Griffith CJ at 663 sets out the plaintiffs contentions in the following terms: "[The plaintiffs] contend that the word "reduce" in article 5 did not include the case of total abolition. They say that the substance of the agreements…was that the undertaking should be for the joint benefit of both parties, who were, in a sense, co- adventurers engaged in an adventure from which each party was to derive a benefit, the amount of the plaintiffs profits as well as the keeping down of the liability of the Government being in substantial part dependent upon the volume of traffic; that the right of monopoly conferred upon them implied a right to make whatever profits, they could during its continuance; that the possibility of making a profit was an essential element of the enterprise; and that the guarantee of a minimum income of £5600 in addition to the subsidy of £4200 was a guarantee of the amount of actual earnings from the traffic, at some rate, whatever it might be, and not a promise to pay a fixed subsidy. And they say that the total abolition of charges involves a subversion of all these conditions-that the position of the company is changed from that of co-adventurers, entitled to the chance of earning more than £5600 a year, to that of servants bound to perform any work imposed upon them by the Government for a fixed remuneration, that the natural consequence of the abolition of the charges would be (as in fact it has been) largely to increase the volume of traffic and the consequent working expenses without giving them any opportunity of recouping themselves by increased earnings. Whatever, therefore, might in another context be included in the natural meaning of the word "reduce", they say that, as a promise would be implied on the part of the Government not to do anything which would prevent the substantial continuance of the adventure from which the plaintiffs were to have an opportunity of making profits of an indefinite amount, the word cannot in this agreement be so construed as to have the effect of authorising the Government to make such a radical change of conditions…" [Emphasis added] 665 The defendant had contended that the power to reduce might be exercised from time to time, and to any extent, so as to bring down the receipts to a merely nominal sum, and that consequently the plaintiffs had not suffered any loss. 666 Griffiths CJ held that the defendant's argument was fallacious: "It does not follow that, because a particular result may lawfully be effected in an authorised way, the same result may validly be effected in another way which is unauthorised. In my judgment the words "shall have power to reduce," do not etymologically, include a power to reduce to nothing or abolish. I express no opinion on the question of how far reduction, not being abolition, could be carried . Apart from the guarantee, indeed, this point would not be arguable. If one person agrees to render services for another at a specified rate of charge, with the power to that other to reduce the rate, it cannot be contended that the power may be exercised so as to require the services to be rendered gratuitously". [Emphasis added] 667 Barton J held that the construction contended for by the defendants, instead of carrying out the party's intentions, would enable the defendants to defeat those intentions in very material respects: "Complete effect can only be given to the compact of the parties by the continuance to the plaintiff company of the opportunity to make some, and perhaps a substantial, profit from the public traffic along their cables" 668 The ultimate holding was that the power to reduce the rates did not authorise the Commonwealth to abolish them Holding in respect of the nil target issue Proper Construction 669 In my view this issue may be decided shortly and by construing the ASP. 670 Upon the proper construction of the ASP Vodafone was not entitled to put forward nil as the target level in respect of the number of connections of new subscribers. 671 A number of pervasive reasons for this holding have generally already been given. A number of the submissions put forward by Mobile in support of the same proposition have already been included in the above reasons. It is however convenient to add by way of supplementing the courts earlier reasoning, the following factors each of which has substance: · Under clause 18.3 the target must be set in conjunction with a business plan. Nil means no business plan. It follows the parties could not have contemplated it as a target. · Clause 17.3 and then clause 32 would have no application because there would be no scope for the agreement of Estimated Acquisition Cost. · The agreement is to perform "Acquisition Services". A nil target is inimical to the notion of performing services. Mobile has an express obligation to perform the "Acquisition Services" (Clause 5.1(a) at TB147). · The formulas in the definitions of "Estimated Acquisition Fee" and "Estimated Acquisition Cost" do not operate with a nil target. · Under clause 13.1(a) Mobile took upon itself the obligation to promote the Mobile Services, subject to Vodafone's reasonable directions from time to time. Mobile must not do anything which would reasonably be regarded as inconsistent with this obligation (TB157). It could hardly be suggested that a reasonable direction could be to stop promoting the Services or from Mobile's point of view it would hardly be using its best endeavours if it refused to promote acquisitions. · The concept of a nil target is contrary to various indicators in the agreement: (i) the definition of "Payment dates" refers expressly to the efficient operation of Mobile's business (TB140); (ii) clause 2.2 - the undertaking by Mobile to devote its Mobile Direct Marketing Operation part of its business exclusively to Vodafone (TB145); (iii) clause 4 – the non-compete obligations (TB147). · The idea that Mobile was to stagnate cannot have been the intention of the parties, objectively construed. · By setting a nil target Vodafone renders it impossible for Mobile to perform its obligations under the agreement. 672 The next question involves whether or not the pleaded terms of an obligation to co-operate, good faith and reasonableness form part of the ASP. As will appear from the following analysis, the very same decision may be reached by the implied term route. Obligation to co-operate 673 The pleaded co-operation term is that Vodafone would: · do whatever was necessary to be done on its part to enable Mobile to have the benefit of the ASP; · refrain from doing anything which would or which would be calculated to deprive Mobile of the benefit of the ASP. 674 In my view just such an obligation to co-operate expressed in such wide terms is shown to have formed part of the ASP. Indeed it would be difficult to suggest for a moment that such a term was not implicit in the ASP and is not implicit in every contract. 675 By far the more important and difficult question concerns moving from the general obligation to the particular. Precisely what conduct will constitute a relevant breach of the duty? Does such duty to co-operate extend to require Vodafone to co-operate: - by producing [by its determination], a positive number of new subscribers to be connected in the next quarter by way of a target [" the limited reach "] or alternatively; - by producing [by its determination], not only a positive number of new subscribers to be connected in the next quarter by way of a target , but also being a number of new subscribers which was reasonably expected by Vodafone to be connected in that quarter ["the expansive reach "]. 676 In my view on the facts presently before the court the duty to co-operate does not go beyond the limited reach. The following parameters are supportive of the implied term giving only the limited reach: · the ASP presents as an agreement for an extended period of years whereunder Mobile, relevantly as exclusive direct selling agent for Vodafone, was reliant upon the business strategy of Vodafone to the extent of being tied to that business. [Indeed this was how the ASP was described in the later prospectus-although of course this fact is not admissible to assist the proper construction exercise]; · the ASP objectively construed against the matrix of circumstances known to both parties at the time it was entered into, conferred an absolute and fundamental right in Mobile to participate together with Vodafone, in the exercise of seeking to gain agreement upon quarterly business plans; · in the absence of such plans being so agreed [or failing agreement, being determined following an exercise of the dispute resolution procedures,] Mobile: - could not and could not reasonably be expected to satisfy any benchmarks at all; - by definition could not satisfy its express obligation to use its best endeavours to promote the Mobile Services. · these matters raised a duty in Vodafone to take such steps as were necessary so as to permit the full realisation of the benefits which the contract contemplated required to accrue to Mobile: cf S Stoljar 'Prevention and Co-operation in the Law of Contract' (1953) 31 Can Bar Rev 231 at 232; Banabelle [67] [68]; · Vodafone's obligation to participate in the business plan preparation/determination exercise and the co-relative benefit which the discharge of that obligation conferred upon Mobile, were respectively such that it is clear that both such obligation, as well as such benefit, were of a fundamental nature such that the Mobile would not have entered into the ASP without an assurance of: - strict or substantial performance of Vodafone's obligation; - the benefit or a real and genuine chance to gain the benefit. · as the contract required Vodafone to carry out the determination of target level so as to permit the contemporaneous attempt to gain an agreed determination of the quarterly business plan, it was required to co-operate by producing [by its determination] a particular positive number of new subscribers to be connected in the next quarter, that is to say a target. Its duty in this regard was a duty to co-operate in bringing about something which the contract did require to happen. 677 The very powerful argument against the implied term with the expansive reach is that it is simply impossible to understand what criterion could be used to measure whether or not Vodafone's determination of a particular positive number of new subscribers to be connected in the next quarter by way of a target could be said to be reasonably so expected. Use of the word "reasonably" in that context gives virtually no assistance at all as to just what is meant. As the ASP makes clear, Vodafone does seem to have been intended by the parties to have had the sole discretion to determine the target. Had the parties intended to qualify that discretion, as for example by an obligation that the target should be fixed by Vodafone by reference to (1) market and economic conditions or (2) to its own then position, taking into account market and economic conditions, the parties would have had to say so expressly. They did no such thing. And as pointed out above, the court is not in a position to in effect spell out what the parties have for themselves failed to agree upon. Nor is the court in a position to clarify that which is irremediably obscure. This problem presented by the suggested expansive reach comprises precisely such a circumstance of irremediable obscurity on the point. 678 Having said that I should make plain that it is likely that the implied duty to co-operate would be breached if Vodafone's discretion could be shown to have been exercised arbitrarily or capriciously. The matter is probably more conveniently dealt with below in relation to the implied obligations of good faith and reasonableness. Clearly some areas of overlap are involved where the two tranches of implied term are concerned. 679 Before moving to good faith and reasonableness it is convenient to note that my own view, consistent with that of Professor Carter, is that it probably does not matter whether the duty of co-operation is referred to as an implied legal duty discerned by a process of construction, a rule of law or an implied term. In terms of the contract before the court for construction the duty of co-operation may be found by each of these routes. Hence the labelling issue is not determinative in terms of the issues presently before the court. Obligation of good faith and reasonableness 680 The pleaded implied term is that Vodafone will act in good faith and reasonably in exercising its powers under the ASP. 681 As with the above analysis in terms of duty to co-operate, the far more difficult question in terms of implication of a good faith or reasonableness term concerns extrapolating from the general to the particular. The real question is as to the reach of the term. Precisely what conduct will constitute a relevant breach of these duties? 682 As already pointed out, this is one of those cases where likely there is an assimilation of the duties of cooperation and of good faith/reasonableness. In that sense both sets of duties extend to cover duties to act honestly and duties to have regard to the legitimate interests of the other party. 683 I would accept that there was an implied obligation to behave honestly and to do all such things as were necessary to enable the other party to have the benefit of the contract. [To my mind these are elements of good faith [cf Peden supra at 165]]. 684 The express reference within the definition of "Dispute" to any failure by the parties "acting in good faith" to agree on any matter arising from or in relation to any aspect of the ASP should not be overlooked. However the definition was subject to clause 32.6 inter alia excluding Vodafone's exercise of discretions given to it under the ASP from the reach of the definition. At least to a limited extent and as part of the attempt to define how, why and when the dispute resolution procedures would be enlivened, the parties have stipulated for a good faith obligation. 685 Probably when focusing upon the discretions given to Vodafone, the matter may be put as an implied obligation to exercise these discretions "honestly and in good faith but having regard to the provisions of the contract by which it is conferred". 686 Quite probably the implied obligation would be breached if the discretions were exercised arbitrarily or capriciously. But this is simply to require that the exercise of the discretion take place following at the least, a proper consideration of the matter after making any necessary inquiries" [cf Abu Dhabi National Tanker Co v Product Star Shipping Limited (The Product Star) (No 2) [1993] 1 Lloyd's Rep 397]. 687 Insofar as it is shown to have been unreasonable for Vodafone to determine a nil target, it is seen to have failed to act in good faith as well as to have acted unreasonably. Since determination of a nil target prevented the parties going forward in an endeavour to reach a business plan, Vodafone is shown to have unreasonably interfered with the enjoyment of an important benefit conferred by the express contractual terms so that the enjoyment was seriously undermined and rendered nugatory. Hence one may regard Vodafone's interference of this kind as (1) a breach of the implied obligation to act reasonably; and (2) a breach of the good faith obligation – insofar as there has been shown to be a failure to comply with standards of conduct which are reasonable having regard to the interests of the parties. 688 The same general result may be achieved by what is probably simply a process of construction showing again the probable overlap between a result achievable by no more than a construction route, and the same result achievable by the application of principles which underpin the implied terms. I refer hereto Mobile's submission that clause 41 of the ASP is a control provision having, it is submitted, an extremely important result. The submission is as follows: · Clause 41 provides: "Where any provision of this Agreement allows the power to Vodafone to exercise any discretion, including where some act of Mobile is expressed to be conditional on Vodafone giving its consent or granting its approval, Vodafone may ( unless that provision provides to the contrary) exercise that discretion in any manner it sees fit" [emphasis added]; · a particular provision, namely clause 18.4, is seen to provide to the contrary. And this for the reason that clause 18.4 provides that the target level will be determined by Vodafone in conjunction with the determination of the business plan [the parties being required by clause 21.1 to use their best endeavours to agree a business plan for the relevant quarter]; · the power to determine the target is therefore expressly limited by the obligation on Vodafone not to set the target other than in conjunction with a business plan; and · therefore as Vodafone was obliged to use its best endeavours to agree a business plan with Mobile and as Vodafone was obliged to set and could only set a target in conjunction with the business plan, its right to set a target was proscribed so that it could only set such target in conjunction with its compliance with an obligation to use best endeavours to agree upon a business plan. 689 Whilst other minds may see substance in this process of reasoning, to my mind it is only partly correct. This is because the parties did not expressly qualify Vodafone's "sole discretion" to determine from time to time, the target level in respect of the number of connections of new subscribers. [1st sentence of clause 18.4]. Nor were the parties prepared to allow the expert to determine any issues concerning Vodafone's exercise of any discretion given to it under the agreement. Hence I do not see that Vodafone's discretion to set a target was proscribed by any such obligation as to act reasonably or in good faith in the sense that it was obliged to put forward by way of a 'target' that a particular positive number of new subscribers was reasonably expected by it to be connected in the next quarter. 690 However Mobile's close focus upon the obligation to determine a target in conjunction with the determination of the business plan clearly does throw up, as it seems to me, an obligation not to refuse to determine a target [nor to purport to determine a target of nil, which is in effect the same thing], for the simple reason that in essence this simply effectively stultifies any further operation of the agreement and could not have been intended. 691 As I have said, when one asks whether the good faith or reasonableness implied term obliged Vodafone to put forward by way of a 'target' that a particular positive number of new subscribers was reasonably expected by it to be connected in the next quarter, it does not seem to me that an affirmative answer can be given to this question. Here one is tampering with the express words of the ASP in an impermissible way. In relation to this field of discourse one is going outside conduct which by definition and with certainty operates to prevent the parties going forward in an endeavour to reach a business plan. One is here seeking to have the court in effect spell out what the parties have for themselves failed to agree upon. As before and for the same reasons the court is not in a position to clarify that which is irremediably obscure. The court would not require commercial parties such as these to behave reasonably towards each other in the matter of fixing positive as opposed to nil targets when, as Peden points out at 164, "they have not expressly included such a standard…" Peden cites the following passage from the United Kingdom Court of Appeal when refusing to imply a term in law: '[t]he common law cannot …devise such a duty which the legislature has not thought fit to impose and it could not be just or reasonable for the court to impose it' . [Reid v Rush Tompkins Group Plc [1990] 1 WLR 212 at 230 per Ralph Gibson LJ]. 692 This is not however to suggest that the implied obligations of good faith and reasonableness would not be breached if shown to have been exercised arbitrarily or capriciously. 693 Vodafone did put an important submission to the following effect: "Mobile was paid a fair price for what was effectively the goodwill of its business. In addition, in return for assuming its obligations under the ASP Agreement, Mobile was entitled to charge Vodafone for the continued management of its existing customers and future customers and to be paid a fee in addition to its costs of acquiring new customers. There is in those circumstances no basis for imposing upon Vodafone an obligation to further underwrite the business of Mobile regardless of whether it considered it was in Vodafone's economic interest to do so. This is particularly the case where provision was made for a guaranteed base acquisition margin." 694 In dealing with this submission it is convenient to review the case law with respect to the implication of a term in connection with the maintenance of a business, which although not four square in terms of reasoning concerning the issue as presently raised, does give some guidance of obvious significance. Implication of term in Connection with the Maintenance of a Business Case law with respect to the implication of a term in connection with the maintenance of a business 695 In this area of the law, the majority of the cases involve the question of whether a business in connection with which the defendant had made the plaintiff an agent, is obliged to be carried on. One may begin with the decision of the Court of Common Pleas in McIntyre v Belcher (1863) 11 BC (NS) 654; LJ (CP) 254 where the plaintiff sold his medical practice to the defendant in consideration for a percentage of the gross earnings of the practice for four years, so long as those earnings did not fall below a certain figure. It was held that there was an implied obligation on the part of the purchaser to maintain the practice. Willes J commented (at 256) that '[t]he nature of the payments are such as to require that the practice should be kept up, in order that the payments may be made. The contract, therefore, to make the payments includes a contract to keep up the practice.' 696 In the year following the decision in McIntyre v Belcher, the Court of Queens Bench heard the case of Stirling v Maitland (1864) 5 B&S 840; 122 ER 1043. There the defendant employed one Seton as agent for a company it controlled. Seton was indebted to that company. The debt was paid by the plaintiff who was then appointed as co-agent with Seton so as to entitle him to a share in Seton's income. The defendant later transferred their business to a third party. The plaintiff claimed there was an implied breach of contract. The claim was upheld. Cockburn CJ said: 'I look on the law to be that, if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative. I agree that if the Company had come to an end by some independent circumstances, not created by the defendants themselves, it might very well be that the covenant would not have the effect contended for; but if it is put an end to by their own voluntary act, that is a breach of covenant for which the plaintiff may sue. The transfer of business and dissolution of the Company was certainly the act of the Company itself, so that they have by their act put an end to the state of things under which alone this covenant would operate.' 697 In re English and Scottish Marine Insurance Company; Ex parte Maclure (1870) L Rep 5 Ch 737 one Maclure entered into a contract with the subject company to act as its exclusive agent for five years in consideration for a fixed salary and a commission of 10% of all the profits of the business. The company was wound up prior to the expiration of five years. The agent claimed against the company for the salary and commission due to him for the balance of the five year period. The claim was rejected. It is desirable to quote at some length from the judgment of Sir WM James LJ (upholding the judgment of Lord Romilly MR) as the views expressed by his Lordship are quite apposite to several of the terms said to be implied into the Consulting Agreement: 'I am of the opinion that this was a contract which did not give the servant the right to determine what the extent of the business was to be. He could not call upon the directors to issue new policies, to accept new premiums, or to take new risks if they were not minded to do it. He could not say 'Such a person has brought in a policy of insurance and you must accept that.' Because, if he had the right to say 'You must carry on the business' he would also have the right to say 'You must carry on the business in the usual and proper manner' and that would be giving a servant the right of controlling the master in the mode in which he chose to carry on his business . Now, I am quite satisfied that the meaning of the contract was nothing of the kind. It was never intended to give the servant the right of dictating as to the extent of the business, whether more or less, or nothing, but he simply took the chance of the company finding it a profitable business and carrying it on. The company had a right to reduce the business to a minimum; and if they had a right to reduce it to a minimum, they had a right to reduce it to nothing - as far as he was concerned. I was referred to a case at Common Law McIntyre v Belcher where this illustration was given: 'If I sell a man all the apples from my apple tree, I have no right to cut down that tree.' But that is essentially different from a man saying "I am going to buy and sell apples, and I will give you 10 per cent upon the profits of the sale of them.' That must, of course, depend upon the amount of apples which the man who enters into the speculation will buy and what price he will be able to sell them at. In such a case the other party could say 'You are not making profits, because you go to a wrong market and buy upon bad terms; you have not got sufficient capital, and you are selling at a loss in order to get money. Therefore, I am entitled to damages for the improper mode in which you carry on your business.' [emphasis added] 698 The matter received the consideration of the House of Lords in Rhodes v Forwood (1876) 1 App Cas 256 where the appellant agreed with the respondent that he should be the respondent's exclusive agent for the sale of coal in Liverpool for seven years. The agents were to receive remuneration upon the basis of a percentage of the coal sold. The agency was determinable by either party in the event of a failure to supply a certain amount of coal or in the event of a failure to sell a certain amount of coal. The respondent sold his colliery, thereby disabling himself from supplying coal. The appellant's argued that he was thereby in breach of an implied term of the contract. The House of Lords rejected that contention. The reasoning of their Lordships focussed upon the various ways in which the agent could fail to receive any payment in connection with the agency and for which the contract made no provision. Thus, their Lordships concluded that the contract here was one which merely provided that a payment was to be made in the event of a business being carried on and was not one which obliged the principal to carry on any sort of business. However, the citation with approval by several of their Lordships (see at 272 per Lord Hatherley, at 275 per Lord Penzance) of Stirling v Maitland (supra) and McIntyre v Belcher (supra), demonstrates that their Lordships considered this question to be one of construction that fell to be determined according to the nature of the contract there under consideration. 699 The next decision to which reference can be made is that of Kay J in re Railway and Electric Appliances Company (1888) 28 ChD 597 where a patent was sold by persons named Gilbert and Sinclair to the Railway and Electric Appliances Company in consideration for a certain sum, plus a royalty for every article made under the patent and a proportion of the profits realised from the manufacture of articles under the patent. The company by inadvertence allowed the patent to lapse and thereupon decided to wind its operations up. The vendors of the patent brought an action claiming that this was a breach of an implied obligation to maintain the patent. Kay J held there was no such obligation and no obligation on the part of the company to manufacture any articles under the patent. On the matter of maintenance of the patent, Kay J (at 607) opined that it was 'to be governed by the interest the company would have in keeping the patent on foot' and not by way of obligation. Kay J does, however, seem to have been of the opinion, that the company would have been in breach of its obligations if it had deliberately failed to maintain the patent. 700 Next, one can turn to the decision of the Court of Appeal in Turner v Goldsmith [1891] QB 544 where the defendant agreed to engage the plaintiff as its agent for five years. After two years the defendant's business was destroyed by fire. The defendant determined the plaintiff's agency. The plaintiff sued. The defendant claimed that that the agency was dependent on the continued existence of his business. The Court of Appeal rejected the contention because there was no stipulation or necessity that the contract of agency was dependent on the continued existence of the defendant's business. Accordingly, the obligation was not discharged. Although the Court seemed to proceed on the basis of the presence or absence of any implied term (see Taylor v Caldwell (1863) 3 B&S 826; 122 ER 309), nowadays the case should be understood on the basis of the presence or absence of a frustrating event: Davis Contractors Ltd v Fareham UDC [1956] AC 696. 701 In the same year a differently constituted Court of Appeal decided Hamlyn & Co v Wood & Co [1891] 2 QB 488 where the defendants agreed to sell to the plaintiffs all the grains produced by the defendants for a period of ten years at prices to be determined from time to time. The defendant later went out of business. It was argued that the defendant was impliedly obliged by the contract to maintain the business. This was rejected by the Court of Appeal. In the view of the Court it was not necessary to imply such a term as no money had been laid down by the plaintiff to purchase the grain and it was thus a contract to purchase so much grain as the defendant did in fact produce in any one year at a price to be determined. However, both Lord Esher MR and Kay LJ appear to have been of the opinion that had the plaintiff paid in advance for the grain, the argument to imply such a term would have been much stronger. 702 Many of the above cases were considered by Scrutton J in Lazarus v Cairn Line of Steamships Ltd (1918) 106 TLR 378 where the plaintiff was appointed the defendant's agent for three years during which the defendant sold their business. The plaintiff (by their counsel Atkin KC) argued that there should be implied into the contract a term preventing the defendant from disposing of the business for the period of the agency. Scrutton J rejected this and dismissed the plaintiff's action, during the course of which he considered many of the cases to which I have referred above and some others and formulated four propositions, the first two of which need not be set out but it is appropriate to set out the third and fourth (at 380): '(3) that where there is a principal subject matter in the power of one of the parties, and an accessory or subordinate benefit arising by contract out of its existence to the other party, the court will not, in the absence of express words , imply a term that the subject matter shall be kept in existence merely in order to provide the subordinate benefit to the other party; (4) but that where there is an express term requiring the continuance of the principal subject matter, or giving the plaintiff a right to a continuing benefit, the courts will not imply a condition that the plaintiff's right in this respect shall cease on certain events not expressly provided for.' [emphasis added] 703 This statement was approved by Scrutton LJ (as he had then become) and Bankes LJ in Reigate v Union Manufacturing Co (Ramsbottom) [1918] 1 KB 592 where the plaintiff had agreed to invest an amount of money in the defendant company and to act as the defendant's agent for seven years (if the agent lived that long), such agency determinable thereafter by either party on six months notice. The agent was to obtain orders subject to the confirmation and acceptance of the company, such confirmation or acceptance not to be unreasonably withheld. The agent was to be renumerated on the basis of a commission on the sales completed by the agent. Subsequently, the defendant ceased business and voluntary wound itself up. The Court of Appeal (Pickford, Bankes and Scrutton LJ) held that by ceasing business and winding itself up the defendant had repudiated the contract of agency. The matters which appeared to weigh upon the Court in reaching this conclusion were: first, that the agency agreement made express provision for the termination of the agency - the death of the agent or the provision of six months notice after the term of seven years - which did not mention the dissolution of the company; second, that the agent was remunerated on the basis of a commission of the sales he effected, in contrast to a commission on overall profits which would be more speculatory in character; third, that the company was only entitled under the agreement to refuse orders procured by the agent on reasonable grounds. Taken in all, the Court concluded that the agency agreement here, like that in Turner v Goldsmith and unlike that in Rhodes v Forwood, was one that was for a fixed period of seven years. 704 In L French and Co Ltd v Leeston Shipping Co Ltd [1922] AC 451 the appellants were shipbrokers who arranged for the charter of a ship belonging to the defendant for 18 months. A commission was payable on the hire paid under the charterparty. After only four months the owner terminated the charter and sold the ship. The appellants demanded payment of the commission for the balance of the anticipated charter period. The appellants alleged that it was impliedly agreed that the defendants would not do anything to determine the charter or to prevent the payment of the hire. The House of Lords rejected this contention and affirmed the Court of Appeal and the trial judge's decision that the sale of the ship was no breach of contract as between the appellant and respondent. Lord Dunedin suggested (at 455), however, that wilful default would only arise if the defendant had taken action for the sole purpose of denying the payment of the commission due under the agreement. The dicta of Lord Dunedin was later explained by Slesser LJ as establishing the proposition that a person is under no obligation to conduct his business in order to enable an agent to earn his commission, but that where a person ceases to carry on a business for the simple and sole reason of avoiding the payment of future commission, the person would be in breach of contract: Kahn v Aircraft Industries Corporation [1937] 3 All ER 476 at 482. 705 The Full Court of this State considered a similar matter in Coulter v Readhead (1931) 31 SR 432 where the defendant had appointed the plaintiff his sole agent for the sale of an encyclopedia in Australia but later the defendant transferred the business and terminated the agency with six months notice. The contract of agency was not a contract for a set period, but did contain provisions permitting one or either party to put an end to the contract upon the occurrence of certain events. Street CJ (within whom Ferguson and James JJ concurred) rejected the contention of the defendant that it was to be implied into the agreement that upon the termination of the business the agency should come to an end. In so doing, Street CJ quoted with approval the words of Scrutton J in Lazarus v Cairns Line of Steamships Ltd (supra) and followed the decision in Reigate v Union Manufacturing Co (Ramsbottom) Ltd. The fact that the parties had expressly provided for the termination of the agency in certain circumstances, namely, if the sales did not reach a certain standard or if one of the parties failed to conduct the business to achieve a certain standard and that the principal was only entitled to reject orders if there was a doubt as to the financial stability of the purchaser led, in the view of Street CJ (at 439) to this conclusion. 706 The matter returned to the House of Lords in Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, a case to which I have briefly referred already. The facts were that the appellant agreed with the respondent that should the respondent secure a purchaser for certain assets a commission on the sale would be paid upon the completion of the sale. No sale took place, although the respondent did find a purchaser ready and willing to purchase. The respondent claimed that the appellant's failure to complete the sale with the nominated purchaser was a breach of an implied term of the contract to 'do nothing to prevent the satisfactory completion of the transaction so as to deprive the respondent of the agreed commission.' The House of Lords rejected the contention that such a term should be implied into the contract and rejected the implication of a less stringent term which prevented the appellant from rejecting the sale arranged by the respondent except for 'just cause.' Viscount Simon LC said (at 120) that '[t]he agent is promised a reward in return for an event and the event has not happened. He runs the risk of disappointment, but if he is not willing to run the risk he should introduce into the express terms of the contract, the clause which protects him.' Lord Wright (at 150) said: 'It may be said that … the prospect of the agent getting his reward is speculative and may be defeated by the arbitrary will of the principal. But I think it is clear that under a contract like the present the agent takes the risk in several respects; thus, for instance, the principal may sell independently of the agent to a purchaser other than the purchaser introduced by him, or where the employment is not as sole agent, he may sell through another agent. Why should not the agent take the chance of the employer changing his mind and deciding not to sell at all? It is said that according to the term which, it is suggested should be implied he can change his mind if he has a reasonable excuse or just cause. But then why should his freedom to dispose of his property be fettered even in this way. And what is a reasonable excuse or just cause. If the suggested implied term is discarded, a contract such as the present will be simple and workable. Commission agents may sometimes fail to get commission that they expected but they will be relieved from disputes and litigation. And they can always, if they desire, demand what they consider a more favourable form of contract.' 707 In Alpha Trading Ltd v Dunshaw-Patten Ltd [1981] 2 WLR 169 the defendants contracted with the plaintiffs to pay them a commission on the sale of cement in consideration for the plaintiffs introducing to the defendants buyers of the cement. The plaintiffs duly introduced such buyers and a contract of sale was effected. The defendants failed to complete the contract and thus no commission became payable. The Court of Appeal affirmed the trial judge (Mocatta J), deciding that as a contract had been entered into between the defendant and the purchaser of the cement, the defendant was no longer free to escape the payment of commission by repudiating the contract of sale. In the judgment of the Court of Appeal, existence of a contract of sale between the defendant and purchaser distinguished the instant situation from that before the House of Lord in Luxor (Eastbourne) v Cooper. However, the Court of Appeal affirmed that 'the court will not imply an obligation on any principal to go on conducting his business in order to enable the agent to earn his commission' (see at 183 per Templeman LJ, also 179 per Brandon LJ). [emphasis added] 708 Finally, it is necessary to refer to two recent New South Wales cases which deal with the issue. First, one may turn to the decision of Young J in RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417. The plaintiffs sold and the defendants purchased a business for a certain sum. In addition, the plaintiffs were to receive an amount to be measured as 5% of the revenue received by the business through the sale of a certain product for 3 years. After 18 months, the defendant ceased to carry on the business. The plaintiff sought a declaration that it was an implied term that the defendant should operate the business for at least 3 years. Relying on the decision on Inchbald v Neilgherry Coffee Tea and Cinchona Plantation Co (Ltd), Young J held that there was an implied obligation on the defendant 'not voluntarily to do anything which would make it materially more difficult for the royalty stream to flow' and that such a term would satisfy the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (at 423). His Honour considered and categorised several cases and stated (at 422) that they showed 'without exception that the claimant is entitled to succeed because there is an implied term that the circumstance from which the person is to get their remuneration will not by the voluntary act of the other party be terminated.' 709 Of this decision, I think four things must be said. First, doubtless, the fact that the situation involved not the remuneration of an agent, but the payment of the vendor of the business distinguishes the decision of Young J from the agency cases I have been considering. Second, apropos his Honour's reliance on the decision in Inchbald, as I indicated above, that decision ought only be understood in the restricted fashion in which Lord Wright understood that decision in Luxor Eastbourne v Cooper (supra at 148). Thus, any act which restricts or makes less likely the accrual of a contingent benefit under a contract will only be a breach of the contract when the act itself is unlawful in some way. Third, and with respect, to my mind the width of the statement of Young J which I have quoted above cannot be justified on the authorities to which I have referred, particularly the House of Lords in Rhodes v Forwood (supra) and subsequent decisions. Fourth, and with reference to the particular term implied by Young J, an implied term to the effect that the purchaser would not 'voluntarily do anything which would make it materially more difficult for the royalty stream to flow' suffers from the vice identified as long ago as 1870 in re English and Scottish Marine Insurance Co; Ex parte Maclure, (supra) in that it imposes an obligation on the vendor not simply to maintain the business, but to maintain the business at a certain standard, capable of no precise expression, in order to meet the interests of a person who's contractual fortunes depend on the performance of the business. 710 The final decision of relevance is that of the Court of Appeal of this State in Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver and Manager Appointed (formerly CEL Home Video Pty Ltd) (1997) 42 NSWLR 462. The appellant and respondent entered into a contract whereby the appellant became the sole and exclusive distributor of the respondent's product. The respondent later went into liquidation and disposed of its business interests to a third party. The appellant claimed that by so doing the respondent had repudiated the contract. Nothing in the contract expressly obliged the plaintiff to continue in business. Kearney AJ at first instance rejected the contention that the defendants were impliedly obliged to do so. The Court of Appeal (Gleeson CJ, Handley JA and Brownie AJA) said (at 473): 'The problem which arises when a principal, having appointed an agent for a certain term, goes out of business before the expiration of the term, is a familiar one. It may arise because the principal disposes of an unprofitable undertaking, or goes into voluntary liquidation, or decides as a matter of policy to discontinue a business, or for any one of a number of reasons. As Street CJ observed in Coulter v Readhead (1931) 31 SR (NSW) 432 at 437; 48 WN (NSW) 161 at 164 there are numerous reported cases in which courts have had to consider whether contracts of this character can without breach, be brought effectively to an end by terminating the business in connection with which they were made: eg., Turner v Goldsmith [1891] 1 QB 544; Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592; Northey v Trevillion (1901) 18 TLR 648; Lazarus v Cairn Line of Steamships Ltd (1912) 28 TLR 244; Re Premier Products Ltd (in liq) [1965] NZLR 50. The first question to be considered is the meaning and effect of the express provisions of the contract. It may be that, upon its true construction, the contract obliges the principal, during the term of the agency, to continue the business or to take certain steps which depend upon such continuance or gives the agent a right to a continuing benefit : cf Lazarus (at 245), per Scrutton J. On the other hand, it may be that there is no such obligation or right to be found in contract. Sometimes one party or the other may seek to rely on an implication; either to the effect that, at least in certain circumstances, the principal may go out of business without being involved in breach of obligations to an agent, or to the effect that, since the arrangements can only take effect so long as the principal carries on a certain business, the principal will not of its own motion put an end to the business: cf Stirling v Maitland (1864) 5 B & S 840; 122 ER 1043; Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at 224. The principles governing the implications are well settled. In particular, any such implication must be necessary and must not contradict an express term: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.' [emphasis added] 711 The Court of Appeal found, contrary to the conclusion of the trial judge, that the contract did impliedly require the defendant to maintain the business and clearly based that conclusion on the presumed intention of the parties as manifested in the contract. The Court said (at 476) that 'the question is whether the agreement, on its true construction, obliged CEL/Vision during the terms of the agency either to continue the business or take certain steps which depended on such continuance or gave the Distributor a right to a continuing benefit which could not be defeated by a decision on the part of CEL/Vision to sell their business and assets' and concluded (at 477) that it did. It is relevant to note that in finding such a duty the Court of Appeal in Roadshow Entertainment proceeded, as did Mason J in Secured Income, to consider the existence of the duty by reference to the importance to the contracting parties of the benefit of the obligation which the cooperation is intended to secure. The Court said (at 476): 'Roadshow was appointed the sole and exclusive distributor of the products of a certain business. That was a valuable right. It is difficult to accept that it was the intention of the parties, as manifested in their agreement, that CEL/Vision could defeat that right simply by transferring to a third party, such as Sunhost, the entirety of the agreement including the benefit of the licence agreements under which the products were produced. The licence agreements held by CEL/Vision were an important part of the commercial background to the agreement, and Roadshow's right to be, for the term of the agreement, the sole and exclusive distributor of products manufactured under such licences was an important continuing benefit which was intended to last during the term of the agreement.' Principles to be derived from the case law 712 To my mind, the above examination of the case law reveals at least three principles. First, at all events if a term is to be implied into a contract that one contracting party must maintain a business, that term is a term implied in fact, which must satisfy the criteria to be found in BP Refinery (Westernport) v Council of the Shire of Hastings (supra) – see Roadshow Entertainment v CEL Home Video (supra). 713 Second, such a term has been implied when a contract of agency contains any or all of the following features: first, it is expressed to continue for an unqualified period (such as Turner v Goldsmith, supra); second, express provision is made for its determination, such provision not referring to the contingency that the subject business may come to an end (such as Reigate v Union Manufacturing Co (Ramsbottom), supra, Coulter v Readhead, supra); third, the commercial context of the subject contract makes it unlikely that the parties contemplated that the contract could properly be brought to an end by the disposal by one party of the subject business (such as Roadshow Entertainment v CEL Home Video, (supra) RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd, supra). 714 Third, notwithstanding and in the absence of any of the circumstances referred to above or other circumstances satisfying the criteria to be found in BP Refinery (Westernport) v Council of the Shire of Hastings, the dependence of one party upon the continuance of the business for the realisation of a benefit will not, in and of itself, cause to be implied into a contract a term which obliges the other party to maintain the business still less to maintain the business to any particular standard – see In re English and Scottish Marine Insurance Company; Ex parte Maclure (supra), Rhodes v Forwood (supra), L French and Co Ltd v Leeston Shipping Co Ltd (supra), Luxor (Eastbourne) v Cooper (supra). In this connection, it has been said that '[t]he life of an agent in commerce is a precarious one:' Alpha Trading v Dunshaw Patten (supra, at 183 per Lawton LJ), a comment which may apply with equal force to any person who's income consists of a commission formulated, directly or indirectly, upon the performance of a business. 715 As with Roadshow Entertainment, Mobile was here appointed as sole or exclusive direct marketing agent. As with Roadshow Entertainment, that was a valuable right. As with Roadshow Entertainment, it is difficult to accept that it was the intention of the parties as manifested in their agreement, that Vodafone could defeat that right simply by refusing to determine a target at any time or at all, or by, what was in effect the same thing, setting a zero target. The ASP was a long term contract providing for a specific term of years. It had very specific provisions with respect to termination. Importantly, as in Coulter, it expressly provided for the stepped but very significant consequences which would flow in the event of the first or second level breaches in terms of failure to meet the defined benchmarks. Further and also importantly, it brought with it the extremely significant covenant by Mobile to devote the Mobile Direct Marketing Operation part of its business exclusively for Vodafone so that it could not during the term, deal, and would procure that none of its related bodies corporate would deal, directly or indirectly, with any other mobile network carrier or operator in respect of analogue or digital phone services. 716 These are all circumstances which are taken into account in terms of the courts here decision that as a matter of the proper construction of the ASP, Vodafone was not entitled to set a nil target or to refuse to set any target. As a matter of implication, these authorities support the finding that the relevant duty to cooperate extended to require Vodafone to cooperate by producing [by its determination], a positive number of new subscribers to be connected in the next quarter by way of a target [referred to above as "the limited reach"]. Exclusion of implied terms 717 Vodafone has submitted that the ASP expressly excludes all implied terms and that in those circumstances there can be no basis for the implication of the co-operation term or the good faith term whether or not they are said to be implied ad hoc or at law or whether or not they are seen to be desirable as between the parties. 718 Clause 24 of the ASP provided: "24.1 (a) (Exclusion) To the full extent permitted by Law and other than as expressly set out in this Agreement the parties exclude all implied terms, conditions and warranties " 719 Clearly whether a term should be implied into a contract is an issue of law to be decided by the Court on the basis of the other terms of the contract and the evidence admissible on the issue: Re Comptoir Commercial Anversois and Power Son and Co [1920] 1 KB and 868; Heimann v Commonwealth (1938) 38 SR (NSW) 691 at 695 per Jordan CJ. 720 The judgment of McHugh and Gummow JJ in Byrne v Australian Airlines Ltd [1995] 185 CLR 410 at 448-450 includes a careful discussion of the circumstance that some implied terms are perhaps more usefully identified as rules of construction applied to the express terms of the contract, particularly to the written terms thereof. Reference is made to Secured Income where Mason J. at 607-608 described as a "rule of construction" the proposition of Lord Blackburn in Mackay v Dick: "I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances". 721 McHugh and Gummow JJ [at 449] make the point that "the more modern and better view is that these rules of construction are not rules of law so much as terms implied in the sense of attributed to the contractual intent of the parties, unless the contrary appears on a proper construction of their bargain". Their Honours hold that "terms of this kind, although treated as implied by law, may be excluded by express provision made by the parties and also as a result of inconsistency with terms of the contract. The result is that, even if treated as rules of law, they only apply in the absence of an expression of contrary intent". The concern of the court that unless such terms be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or perhaps, be seriously undermined, is said to underpin many of the terms now said to be implied by law in various categories of case. [at 450] 722 In Hart v Macdonald [1910] CLR 417 O'Connor J at 427 put the position as follows: "Where in a contract of this kind a term is to be performed by one of the parties, which is not reasonably possible of performance unless something is done by the other party, the law will imply a promise by that other party to do that something. That implication arises whether there is a condition such as that at the end of this contract or not. Every implication which the law makes is embodied in the contract just as effectively as if it were written there in express language. The plaintiff's cause of action as alleged in the first count of the declaration, seems to me to be established by the terms of the contract itself, reading into it a condition which the law will imply." 723 His Honour cited the following passage from Krell v Henry (1983) 2 KB 740: "I think you have first to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstance as recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited" 724 Griffiths CJ at 421 cited the following passage from Oriental Steamship Co v Tylor (1893) 2 KB at 527: "The case comes within the well-known rule that when the contract as expressed in writing would be futile, and would not carry out the intention of the parties, the law will imply any term obviously intended by the parties which is necessary to make the contract effectual". 725 In Castlemaine Tooheys v C & U Breweries (1987) 10 NSWLR 468 Hope JA at 490 accepted that "where the law implies a term in a class of contract, that term may be excluded by an express provision to that effect, but it may also be excluded as being inconsistent with a term or the terms of the contract", expressing also the opinion that in some cases at least, it would be appropriate also to have regard to the matrix of facts in which the transaction took place. 726 The above reasons serve to set out the extent to which the implied terms of cooperation and good faith/reasonableness [limited as to relevant content], have been held to form part of the ASP. The terms are implied in the sense of being attributed to the contractual intent of the parties, discerned from the ASP objectively construed, the contrary nowhere appearing upon a proper construction of their bargain as reduced to writing in the form of the ASP. 727 The word "expressly" in the phrase "other than as expressly set out in this Agreement" requires some examination in this context. It is possible for the parties to express their agreement to a particular obligation without that obligation being written. In this sense it is not "expressed" but it is nonetheless to be discerned as part of the parties contractual intent. This is the position in terms of the manner in which the ASP is here construed. 728 Properly construed the implied terms which have been found by the court are embodied in the ASP just as effectively as if they were written there in express language. They spring out of the bargain discernible from the ASP. 729 It follows that the defendant's submission that the implied terms now found by the court to be part of the ASP were expressly excluded by clause 24, is rejected. Returning to the Mobile case 730 It may be appropriate before moving on, to make explicit that Mr Hammerschlag advanced a sophisticated argument grounded upon the proposition that Vodafone being obliged, so it was submitted, to use its best endeavours (which obligation, by definition, it was submitted, Vodafone would have to discharge in good faith) to agree a business plan, it was not possible for Vodafone to set an absurd target (say for example 10 million per quarter), nor that matter, to set an absurd tariff. The submission was that for Vodafone to set an absurd target and then to assert that it had engaged in a best endeavours attempt to agree a business plan for such target, could not occur consistently with what was put as the proper construction of the ASP. The submission was that a particular control may be seen to have been built into the ASP. The submission was that this control in terms of the exercise of Vodafone's discretion lying within the clause providing for the setting of a target in conjunction with a bona fide business plan, would have as its natural consequence, the protection of the underlying substratum of the ASP. The submission was that Mobile did not contend for an obligation that Vodafone underwrite its business. The only content of the relevant obligation was said to be: · not to set nil; · to set a target; · to set that target in conjunction with the business plan; · to use its best endeavours to agree that business plan with Mobile; and · in the event that after best endeavours there was no agreement, to have resort to the dispute resolution procedure. 731 At the same time this submission was sought to be bolstered by reference to the clause 11.3 ASP procedure to take place in the event of a failure to meet a first level benchmark. That procedure provided for a review of that part of Mobile's operation relevant to the benchmark in respect of which the first level breach had occurred. It further permitted Vodafone to require that Mobile retain a nominee of Vodafone to examine Mobile's business and to report to both parties on ways of ensuring that Mobile satisfied benchmark. Within five business days after receipt of the report following that examination, Mobile was to: "give Vodafone a written Plan detailing steps it intends to implement which are designed to ensure that the Benchmark is satisfied.. If the first level breach continues for a further three months Vodafone may, by notice to Mobile, require that Mobile implement a Vodafone Plan. A failure by Mobile to comply with a Vodafone Plan will be a breach of this agreement". 732 "Vodafone Plan" was defined in clause 1.1 to mean "a written action plan prepared by Vodafone outlining the steps to be taken by Mobile to remedy a first level breach, which plan is reasonable having regard to: (a) the anticipated costs to Mobile of implementing the Plan (b) the nature of the first level breach (c) the impact on Vodafone as a consequence of the first level breach not being remedied; and (d) any other matter relevant in the circumstances." 733 Mobile sought to rely upon this scheme of what would follow in the event of a first level breach, as evidencing Vodafone's obligation to produce a plan which was reasonable having regard to these several integers. 734 The court's earlier given reasons have been clearly set out. The above described argument has been taken into account but does not serve to outweigh any of the courts reasons nor to suggest that those reasons are incorrect in any parameter. The Way Forward 735 Following the above analysis in terms of the proper construction of the ASP and in terms of the pleaded implied terms, it is necessary to look at the logical way forward. 736 Clearly enough the issues which arise for consideration are as follows: · what alternatives by way of targets should the court find would have been set by Vodafone; · assuming such targets to have been set, has Mobile suffered any loss as a result of Vodafone's failure to set such targets; · the quantum of such loss. 737 At the threshold are the principles dealing with causation and damage. Causation and Damages/Loss Onus 738 Clearly enough Mobile bears the onus of proving the extent of the loss or damage, if any, sustained by reason of Vodafone's breach-of-contract. Mobile has to establish both that the loss or damage was caused by Vodafone's breach and that the loss or damage was not too remote. [Halsbury 110 - 110175]. 739 Causation does not depend on remoteness or immediacy in time: Monarch SS Co v A/B Karshamns Oljefabriker [1949] AC 196 at 227 per Lord Wright. Nor is it concerned with philosophic speculation; it is only concerned with ordinary everyday life and thoughts and expressions. Monarch SS Co at 228; Alexander v Cambridge Credit (1987) 9 NSWLR 310 at 315, 350,351. Causation is a question of fact: Bennett v Minister for Community Welfare (1992) 176 CLR 486 at 412 - 413. Questions of causation are not however answered in a legal vacuum. Rather, they are answered in the legal framework in which they arise: Chappel v Hart (1998) 195 CLR 232 at 238 per Gaudron J. It suffices for the plaintiff to prove that, but for the defendant's breach, the loss or damage in question would not have been suffered. This is not however an exclusive test and in most cases the relevant question is whether the defendant's breach was so connected with the plaintiffs loss or damage that, as a matter of ordinary commonsense and experience, it should be regarded as a cause of it: March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 at 522. [See generally Halsburys' Laws of Australia [110 - 11155] and footnotes 1 - 6] Difficulty of assessment 740 It is well established that the fact that damages cannot be assessed without difficulty and uncertainty does not relieve a court from the responsibility of attempting to assess them as best it can: Commonwealth v Amann Aviation (1991) 174 CLR per Deane J at 125 citing Howe v Teefy (1927) 27 SR (NSW) 301 at 306; McRae v Commonwealth Disposals Commission (1951), 84 CLR at 411,412] [cf Amann Aviation at 83 per Mason CJ and Dawson J, at 102 per Brennan J, at 135 per Toohey J, at 153 per Gaudron J. As Deane J pointed out, Dixon and McTiernan JJ had expressed the proposition in Fink v Fink (1946) 74 CLR at 143: "Where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat the only remedy provided for breach-of-contract, an award of damages." 741 A nominal award will be made if it is impossible to say that there is any assessable loss resulting from the breach. 742 Further the assessment of damages in contract [and tort] is "a pragmatic subject… [which] does not lend itself to hard and fast rules". [Amann Aviation at 119, citing Takaro Properties Limited v Rowling [1986] 1 NZLR 22 at 69 per Cooke J, Johnson v Agnew [1980] AC 367 at 400 - 401] Hypotheticals 743 Breach of contract being actionable per se, "a plaintiff should be able to recover damages if he or she is wrongfully denied the benefit of the chance contracted for, provided always that the chance can be valued in economic terms": Coote, "Chance and the Burden of Proof in Contract and Tort", Australian Law Journal, vol 62 (1988), 761 at 771. Hence a series of decisions of the High Court of Australia in recent years have affirmed the principle that a contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for damages for the loss of that advantage or opportunity. Damages are "ascertained by reference to the court's assessment of the prospects of success of [or loss of opportunity] had it been pursued": cf Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 354 per Mason CJ, Dawson, Toohey and Gaudron JJ. [See in particular Commonwealth v Amann Aviation Pty Ltd (1991) 194 CLR 64; Sellars v Adelaide Petroleum NL (1992) 179 CLR 332] 744 The principle had been explained in 1970 by Lord Diplock as follows: 'The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions in determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate of what the chances are that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.' [Mallett v McMonagle [1970] AC 166 at 176] [Emphasis added] 745 In Amann Aviation, Deane J dealt with the frequent inability of curial procedures to determine with certainty what has happened in the past, let alone what would have been or what will be, which necessarily gives rise to the need for a number of subsidiary rules governing the determination of the loss or injury which a plaintiff has actually sustained by reason of a wrongful act. As his Honour pointed out in dealing with loss of a chance: "In many cases, proof of the full extent of the loss or injury sustained would involve establishing an evidentiary foundation for positive and detailed ultimate findings by the court upon the balance of probabilities. There are, however, cases where considerations of justice or the limitations of curial method render ultimate findings, about what would have been or will be, impracticable or inappropriate. In such cases, damages must be assessed on some basis other than findings about what would have ultimately happened if the repudiation or breach had not occurred or about the precise ultimate implications of the situation which exists after the repudiation or breach. In particular, it may be appropriate that damages be assessed by reference to the probabilities or the possibilities of what would have happened or will happen rather than on the basis of speculation that probabilities would have or will come to pass and that possibilities would not have or will not. If, for example, what the plaintiff has lost by reason of the defendant's repudiation or breach-of-contract is a less than 50% but nonetheless real and valuable chance of winning some contest or prize, of being the successful tenderer for some commercial undertaking or of deriving some other advantage, in circumstances where a court can decide that a proportionate figure precisely or approximately reflects the chance of success but can do no more than speculate about whether, but for the defendant's wrongful act, the plaintiff would have actually won the contest, prize or tender or derived the advantage , it would affront justice for the court to hold that the plaintiff was entitled to no compensation at all for the loss chance of competing or striving or for the wasted expenditure which was incurred in obtaining or performing the contract. In such a case, considerations of justice require that the plaintiff be entitled to recover the value of the lost chance itself and that the defendant be not allowed to take advantage of the effect of his own wrongful act to escape liability by pointing to the obvious, namely that it is theoretically more probable than not that a less than 50% chance of success would have resulted in failure… The assessment of common law damages for breach-of-contract or tort was traditionally seen as a matter for the good sense of the jury. Within the context of the principles laid down in Hadley v Baxendale , the more particular rules for assessing damages for repudiation or breach-of-contract should be treated not 'as rigid rules of universal application' but 'as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation … without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept" [citing Walsh J in Wenham v Ella (1972) 127 CLR 454 at 466] [At 118-119] [Emphasis added] 746 The approach was later summarised as follows in Sellars: 'In the realm of contract law, the loss of a chance to win a prize in a competition resulting from breach of a contract to provide the chance is compensable, notwithstanding that, on the balance of probabilities, it is more likely than not that the plaintiff would not win the competition. ( Chaplin v Hicks [1911] 2 KB 786; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411 - 412). As the contract contained a promise to provide the chance, the breach of the contract resulted in the loss of the chance and that loss was for relevant purposes, an actual loss, in the sense in which Dixon and McTiernan JJ used that expression in Fink v Fink [(1946) 74 CLR 127 at 143]. And where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat an award of damages . . . The damages will then be ascertained by reference to the degree of probabilities, or possibilities, inherent in the plaintiffs succeeding had the plaintiff been given the chance which the contract promised. [at 349 per Mason CJ, Dawson, Toohey and Gaudron J] ;\ Loss or benefit or detriment dependent upon the making or exercise of discretionary decisions 747 Deane J specifically identified examples of cases where damages should be assessed on the basis that what has been lost or inflicted is the probabilities or possibility of benefit or detriment as distinct from the benefit or detriment itself. Damages should be assessed on that basis "in a case where the extent of the final loss or injury actually sustained by reason of the repudiation or breach depends upon what would have happened or what will happen and the circumstances are such that the court can identify or estimate a precise or approximate proportionate chance of benefit or detriment but can do no more than speculate, on the basis of probabilities and possibilities, about what would have or will actually come about"[at 120]. One example of such cases specifically identified by His Honour are cases where the extent of the lost benefit or eventual detriment depends wholly or partly upon how a discretionary decision or power would have been or will be made or exercised. Another concerned cases where the extent of the lost benefit or eventual detriment depends wholly or partly upon the extent to which a commercial opportunity, activity or undertaking would have been or will be successful or unsuccessful. 748 Deane J in Amman held at 128 that "at least in a case where proof of that is impossible or difficult, it is presumed in the plaintiff's favour that the future net benefits…which would have been derived from performance of the contract would have been of a value sufficient to recoup the value of the past net expenditure reasonably incurred in procuring or performing it." 749 S M Waddams "Damages: Assessment of Uncertainties" (1998) 13 Journal of Contract Law 55, 58 – 59, has expressed the matter the follows: "The conclusion would seem to be that the plaintiff can generally recover the amount of expenses incurred in preparation for performance, but only those expenses wasted because of the breach-not those expenses that would have been lost even if the contract had been performed. In case of uncertainty on this question the court may, and often will, infer that had the contract being carried out the plaintiff would at least have 'broken even' by recovering the expenses. In most commercial situations money is expended in the expectation of profit, sometimes long-term commercial advantage that is not easily quantifiable, and where the defendants breach has, by preventing performance, made it impossible to know what profit the plaintiff would have made, it is reasonable and just to infer, in the absence of contrary proof, that revenue would at least have equalled expenditure . No special legal rule reversing the onus of proof is necessary to support this position …there are many cases on the assessment of damages both in contract and in tort where it has been said that inferences may be drawn in favour of the innocent party. Some of the judges in the Amman case spoke of its being 'impossible' for the plaintiff to prove its loss [Brennan J at 105, Gaudron J at 154 'not possible']; others spoke of its being impossible or difficult ['Deane J at 106,'impossible or difficult', Toohey J at 137 'difficult or impossible']. In all cases of this sort, completion of performance fails because of the defendants wrong. Many of the crucial facts on which depends assessment of the profitability of performance necessarily therefore become matters for speculation. It can be said in all such cases that it is the defendants breach that has made assessment difficult, and it should not be necessary for the plaintiff to show that assessment is, strictly impossible; from one point of view, assessment of damages is never strictly impossible, for the court will, if necessary, do its best in the face of uncertainty… But in many well accepted cases…the court has leaned in the plaintiff's favour where it is the defendant's wrong that makes assessment difficult." [Emphasis added] 750 The very recent decision of the High Court in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 (11 March 2003) includes reference made by Hayne J (with whose decision as to the allowing the appeal and orders appropriate Gleeson CJ, McHugh and Kirby JJ concurred) to the fact that the cross-claimant had to prove that it had suffered damage as a result of the cross defendant's breach-of-contract, but also the amount of the loss it had sustained: "It goes without saying that it had to prove these matters on the balance of probabilities and with as much precision as the matter reasonably permitted [ Amann Aviation 174 DTCL at 80, 83-84,138,153,161; Ratcliffe v Evans [1892] 2 QB 524]". Hayne J added: "It may be that, in at least some cases, it is necessary or desirable to distinguish between the case where a plaintiff cannot adduce precise evidence of what has been lost and the case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. [ Fink v Fink (1946) 74 CLR 127; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; Jones v Schiffmann (1971) 124 CLR 303; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83 per Mason CJ and Dawson J, 138 per Toohey J] References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can [ Fink v Fink (1946) 74 CLR 127 at 143 per Dixon and McTiernan JJ; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411-412 per Dixon and Fullagar JJ; The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83 per Mason CJ and Dawson J] may find their most apt application in cases of the former rather than the latter kind…" Doctrine of efficient breach 751 Vodafone prays in aid the rule that where there are two or more ways in which a defendant might perform a contract, the Court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant. There is high authority in support of the existence of this rule which is said to be a manifestation of the principle that damages will not be awarded for not doing that which there is no legal obligation to do [Cockburn v Alexander (1848) 6 CB 791, at p 814 [136 E.R. 1459, at pp.1468 - 1469], per Maule J; Withers v General Theatre Corporation [1933] 2 KB 536 at p 551 per Scrutton LJ; TCN Channel 9 v Mayden Enterprises (1989) 16 NSWLR 130 at pp 150 – 156 per Hope JA; Amann Aviation (1991) 174 CLR at 92-93 per Mason CJ and Dawson J; cf Biotechnology Australia (1988) 15 NSWLR 130 where McHugh JA at 156 recited further authorities in support of the proposition that "[w]here the contingency is dependent upon the way in which the party in breach of the contract would perform the contract, the settled rule is that damages are assessed on the basis that the wrongdoer would have performed the contract in the way most favourable to himself. 752 In TCN Channel 9 (1989) 16 NSWLR 130 the holding was that the principle ascribed to The Mihalis Angelos [but see Amann at 93] that where a defendant in proceedings to recover damages for breach of contract has a right under the contract to alternative methods of performance, the court should assume that the defendant would have performed the contract in the way least advantageous to the plaintiff and most advantageous to the defendant, allows and requires that regard be had to the facts and relevant circumstances in a manner which avoids the assessment of damages based on a fiction that a defendant would have adopted one method of performance when the facts belie that possibility. Hope JA at 154 made the point that the question of what is the least burdensome mode of performing the contract for the defendant is not to be tested by isolating the particular contractual provision and a defendant's right under it from the rest of the relevant circumstances. This point had been made by Diplock LJ in Lavarack v Woods Colchester Ltd [1967] 1 QB 278 at 295-296 in the following terms: "The events extraneous to the contract, upon the occurrence of which the legal obligations of the defendant to the plaintiff thereunder are dependent, may include events which are within the control of the defendant: for instance, his continuing to carry on business even though he has not assumed by his contract a direct legal obligation to the plaintiff to do so. Where this is so, one must not assume that he will cut off his nose despite his face and so control these events as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects. That would not be the mode of performing the contract which is 'the least burthensome to the defendant' ". 753 As Hope JA observed in TCN Channel 9: "In some cases, the evidence may be silent as to whether the defendant would have exercised the option apparently favourable to himself; in other cases, although not silent, the evidence may not justify a finding that the defendant would not have exercised it. In these cases it can be said that it is 'a natural inference from the terms of the contract' that the defendant would have exercised that option which in terms benefits him: cf Evans Marshall and Co Ltd v Bertola SA [1975] 2 Lloyd's Rep 373 at 390 per Buckley LJ. It is not a natural inference when the facts point to the opposite conclusion. In my opinion, consistently with the many authorities which establish that regard can be had to evidence of facts between the time when a cause of action arises and the time of trial in order to produce certainty where there would otherwise be uncertainty, the general preference of the law for fact rather than hypothesis is applicable to the principle under consideration. That principle does not require the assessment of damages to be based on a fiction in disregard of the actual facts". Vicissitudes 754 In Hungry Jacks the Court of Appeal dealt reasonably closely with discounts for vicissitudes. Rolfe J had found on the probabilities that HJPL would have continued to develop restaurants, but for the breach by BKC. The trial judge was satisfied that the breach of contract had caused HJPL to lose the opportunity to develop further restaurants and introduce franchisees. One step in assessing the damages for the loss of that chance was to estimate the number of restaurants that would have been opened and the number of franchisees that would have been introduced during the period in question. The next step was to assess the value of the opportunity lost. In discussing the authorities on this next step, the Court of Appeal cited the following passage from Daniels v Anderson (1995) 37 NSWLR 438 at 530: "…the issue of causation should be approached upon the basis of proof, upon the balance of probabilities with the qualification that an assessment of whether the chance which is said to have been lost had a value is to be made upon the possibilities or probabilities of the case". 755 The Court of Appeal Judgment then referred to the judgment of Clarke JA, with whom Handley and Sheller JJA had agreed, in Norris v Blake [No 2] (1997) 41 NSWLR 49 referring to Malec, McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411 - 2, Fink v Fink (1946) 74 CLR 127 at 134 – 5, Commonwealth v Amman Aviation Pty Limited (1991) 174 CLR 64 and Poseidon Ltd & Sellars: "There is nothing in any of the judgments of the High Court (except perhaps the reference to percentages in the majority judgment in Malec ) which supports the adoption of a scientific, or quasi scientific, approach to the assessment of damages in a case in which there is a requirement that account be taken of future possibilities and past hypothetical situations. That is not to say that where a scientific method is available it should not be adopted. Indeed, in my opinion, if there is evidence in a case capable of demonstrating that a particular scientific approach is likely to reach a more accurate assessment than an intuitive judicial approach then, provided full weight is given to the uncertain nature of the future, there is no reason for failing to adopt that method. The theory behind the approach in Chaplin v Hicks [1911] 2 KB 786 is that the defendant's breach of contract or tort has caused the plaintiff to lose an opportunity or chance which has some value. The chance may be a gain or a loss. In simple terms it is possible to buy a chance to win an amount of money if a particular horse wins a race. On the other hand, the owner of property may pay a premium which entitles it to a sum of money if the property is destroyed by fire. The measure of the value of the chance is the price represented by the wager or the premium. Almost invariably this will be measured by known facts such as the horse's racing history or the state of the track, or the susceptibility of the property to fire. It will also be affected by the vendor's, the bookmaker's or the insurer's willingness to accept the risk that the horse may win or the property be destroyed. The chance may be spoken of in various ways including percentages. Thus the legal adviser may tell the client that the case has an X% chance of success. But though based on known facts, the state of the law, the availability of witnesses and so on, even in the simplest examples such language masks the imprecision of the estimate." 756 The Court of appeal in Hungry Jacks further commented as follows: "591 Clarke JA then quoted from an essay by Lord Keynes in the chapter "The Meaning of Probability" in the essays gathered in Treatise on Probability (1973) at 29 and an article written by Hodgson J (as he then was) on "Probability and Proof in Legal Fact Finding" (1995) 69 ALJ 731. In the first of these quotations, Lord Keynes said of Chaplin v Hicks [1911] 2 KB 786 that the probability could be by no means estimated with numerical precision. In the second, Hodgson J said that, generally, considerations for and against particular findings of fact cannot be expressed in numbers to which one can apply quantitative rules so as to arrive at a numerical probability. His Honour said "... decision making generally involves a global assessment of a whole complex array of matters which cannot be given individual numerical expression" . Hodgson J warned that concentration on mathematical probabilities can prejudice the commonsense process which depends upon experience of the world and beliefs as to how people generally behave. 592 Clarke JA said: "It may be that it is possible to apply a mathematical theory of probabilities, or a doctrine of averaging, in a case in which the chances are limited and there is sufficient data on which to reach a conclusion as to the particular degree of chance." 593 In Fightvision Pty Limited v Onisforou (1999) 47 NSWLR 473 the Court said at 505-6 by reference to Norris v Blake [No 2] : "It is not essential, however, in making an assessment of damages of this kind to express a percentage possibility or probability of the occurrence of the events necessary for the claimed loss of profits, here the number of fights and the amounts of earnings. ... Therefore the customary course of taking a hypothetical exercise of an uninjured earning capacity until retirement, then making an allowance for vicissitudes, is a way of arriving at the degree of probability of the future hypothetical event of the exercise of that earning capacity. Although in many cases the hypothetical exercise of earning capacity is not controversial, it may be, so that the vicissitudes include allowance for the validity of the hypothesis as well as for the imponderables or chances affecting its realisation. ... It can make no difference in principle if a past hypothetical event is in question rather than a future hypothetical event, or if damages for loss of profits rather than for lost earning capacity is in question." 594 In the context of this appeal it is significant that the Court acknowledged that the discount for vicissitudes may include an allowance for the validity of the hypothesis . 595 In the present case HJPL's loss, due to BKC's fault, was the loss of an opportunity to expand its business. There is no reason in principle why the value of that loss should not be measured by the number of restaurants that would otherwise have been opened in the years in question. Of course, as Rolfe J pointed out, the finding to be made is not of what happened but what would have happened. It was appropriate to calculate the discount in a way which had regard to the possibility that HJPL would not have opened 17 new restaurants in each of the years in question or introduced 77 new franchisees during those years. The base chosen was the best estimate of how many restaurants would be opened or how many franchisees would be introduced in the years in question. The degree of the decision-maker's confidence in that best estimate will be reflected in the discount for contingencies." Dealing with the matter 757 Clearly Vodafone has breached the contractual obligation not to set a nil target and likewise by refusing to determine targets at all. 758 Effectively the contractual breach was the conduct by Vodafone which in substance prevented the further operation of the ASP - Mobile is seen to have been stopped in its tracks from going forward promoting the Mobile Services by following and working pursuant to business plans. This was the mechanism selected by the parties as the engine of the enterprise. [I should interpolate that when I refer to the prevention of "the further operation of the ASP " I do not intend to suggest that "Look Mobile" [see the Amendment agreement of 15 August 2000 [11/ 1330AB] was in any way affected, at least directly, by the above described conduct [see Mobile's Annual Report to 30 June 2001, 9/ 1622 at 1626] Applying these principles 759 There is no doubt but that Mobile has suffered actionable loss occasioned by reason of Vodafone's setting of nil targets or refusing to set any targets. It has proven on the balance of probabilities that Vodafone's breach of the ASP caused it to lose an opportunity of clearly high value, namely the opportunity to make profits through the activity of participating in the endeavour to agree upon business plans and then to follow those business plans. It lost an opportunity because once no targets were set, the whole of the scheme set by the ASP underpinning its participation into the future went into freeze mode. And this remains the position today. 760 Deane J as has already been seen, adverted to cases where the extent of the lost benefit or eventual detriment depended wholly or partly upon how a discretionary decision or power would have been or will be made or exercised. 761 In the present proceedings Vodafone did not set about the task of adducing evidence from the primary decision maker as to what Vodafone may have determined to do in the absence of the making of the nil targets decision. The court's finding of fact is that is Mr Townsend took the significant decisions and may be regarded as having been the significant decision maker. As Ms Blake conceded, she reported to Mr Townsend, he had the executive responsibility for the actual setting of targets, he took the decision to set the 9,000 figure for the September quarter and he took the decisions to set nil for March and June. Generally the correspondence and evidence as to meetings and communications makes quite plain that he was the central and significant decision maker. This notwithstanding that the sales director and members of the sales team participated or had input. To the extent that the evidence of Mr Maher may be regarded as having suggested to the contrary and as having attributed to both Mr Townsend as well as to Ms Blake the ultimate responsibility to make relevant decisions, this evidence is not accepted as reliable. Arguably the failure to call Mr Townsend simply means that the court looks to the loss of Mobile's chance to obtain the benefits to which it was entitled under the ASP. This simply transforms what is already a very difficult exercise into one which is even more difficult. 762 What the present exercise involves is an ascertainment of the quantum of the loss by reference to the possibilities: Sellars at 355, Daniels v Anderson at 530-531 and 564. As has already been seen, in assessing such damages courts have not confined themselves to a rigid application of percentages but rather have adopted a broad approach involving general discounts for vicissitudes [Fightvision Pty Ltd v Onisforu (1999) 47 NSWLR 473 at 504-506; Burger King (supra) at (593) & (596)]. 763 Ms Blake was cross-examined in relation to her processes of reasoning when forming the conclusion that zero should be the target. The only document of which she was aware in 2001, with in Vodafone, in which different targets for the year all quarters commencing 1 April 2001 were considered was the document which became exhibit P5. [Transcript 1056]. She did not believe that a target of one was considered. [Transcript 948] She did however accept [Transcript 949] that her understanding was that: · if a target had been set of a positive number as opposed to zero, there would be room for the application of costs to acquire; · the more subscribers Vodafone would acquire, the lower the cost per subscriber; · if a very low number had been set, for example "1", the cost to acquire that subscriber would have included all the rent for that quarter and all kinds of overheads divided by 1; · whereas if a target of 1000 was set the cost to acquire would be that number divided by 1000 [Transcript 949] 764 One of the reasons which had an impact upon her mind by setting a zero target was that there would be no cost to acquire payable. 765 Under re-examination she gave the following evidence: "Q. You were asked some questions about the basis on which you took the view a nil target was appropriate, you were asked this: "The cost to manage figures were a factor you took into account in making your decision?" A. The whole profitability had to be looked at together, one can't look at it, at any one cost individually." Q. I ask you this; how, in your opinion, as at the time you set the nil target, was profitability to be determined? A. Profitability is determined by looking at the over all revenues and costs associated with a customer that you are acquiring. So, firstly, the cost to acquire is spent and then revenues are accrued during the life of that customer and costs are associated with managing that customer. Cost to manage is one fact in determining the profitability of the customer but it's only important in relation to the revenues you are getting from the customer and how much it costs to acquire the customer. Q. You were asked this question at page 949, line 46: "I want to suggest to you the following that the following are amongst the reasons you had, that you personally had for agreeing to a zero target. Number one; zero meant you would not be liable for any cost to acquire for the quarter?" A. It's difficult to answer in isolation because I personally looked at it as a whole as opposed to the individual elements of costs" … Q. What did you mean when you said you personally looked at it as a whole? A. What I just mentioned with profitability; in determining when a customer is profitable or unprofitable I looked at the value of the customer, as in how much the customer is spending, how much it is costing us to acquire them and how much it is costing them to manage them. It was not pay costs to acquire for customers that would never show a profitable return." [Transcript 1061-1062] 766 A hypothetical question was put to Ms Blake under cross-examination, namely had she come to the conclusion that zero was not a target, could she now say what target she would have set. The answer was: "It would have been a low number. The exact number would hard [sic] to be specific because we would have had to look at some modelling as to what connections there would have been, what values, what plans, what cost to acquire. It would have been a low number because until we could get them to be more profitable we didn't want to connect very many. It is better to lose money on a low number of connections than a high number." [Transcript 940] 767 It seems to me to be far too simplistic to analyse the factual question which is raised for determination by suggesting that Vodafone would have set a target of 1 or of some number colourably the same: Ms Blake said as much. In this regard it is also relevant to bear in mind that Vodafone had been content to subject itself to the prohibitions with respect to the persons conducting Mobile Direct Marketing operations in competition with Mobile with whom it might deal [clause 2.7]. Hence the court is entitled to infer from the wording of the ASP that Vodafone had an interest in the continued viability of Mobile, if only because of Mobile's appointment by the very terms of the ASP. 768 It was one thing for Vodafone to · be concerned in the extreme with the difficulties it was experiencing in terms of Mobile's focus upon low-level access acquisitions and perceived failure to acquiesce in or produce what Vodafone regarded as viable alternative plans; and · to have elected to endeavour, using its discretionary power to set targets as a pragmatic weapon of persuasion. 769 It was altogether another thing for Vodafone to clip Mobile's wings by setting a target such as would effectively limit Mobile either: · to such profitability as to Vodafone may seem sufficient to do no more than to permit Mobile, as appointed direct marketing agent, to survive; or · to a relatively low but not laughable figure, in which event the background thinking would have been to keep Mobile on a tight rein so as to ensure that it would continue to endeavour to come up with constructive proposals with respect to new plans. 770 The former approach is that which in my view and on the balance of probabilities, weighed in the light of all of the evidence, is likely to have been taken by Vodafone. Whilst it is very difficult to make a finding of fact as to how Vodafone's discretionary decision or power would have been exercised had the nil target estimate not been made, in my view a target of 12,000 acquisitions per quarter [ie based upon 4000 acquisitions per month] would have been made in respect of the December 2001 quarter and in respect of each of the following 5 quarters. 771 This conclusion is reached in a judgmental fashion taking into account each of the following considerations, none of which is pervasive, but all of which seem to me to play a proper part justifying the finding: · the number 12,000 was the number for calculating Minimum Base Acquisition Margin in the ASP[4,000 per month]; · when Vodafone sought for the first time to drastically reduce targets on 7 March 2001 [TB 775], the target was 12,000 new connections for the year, but the forecast connections for the first quarter of that year were 12,000 new connections. Accordingly, there would have been nil for the remaining 3 terms. Thus, when it came to choosing between a real target and nil, Vodafone chose 12,000 for the quarter; · during the December 2001 quarter and the March and June 2002 quarters, Mobile experienced churn of 15,762, 11,413 and 11,759 for each quarter, respectively. This represents an average churn for those quarters of 38,934 / 3 = 12,978 per quarter = 4,326 per month. This calculation would keep Mobile in a state of static equilibrium (see the Schedules provided by the plaintiff appendix "H" which reflect these calculations); and · for the last quarter where a target was set in respect of which there is no dispute, the number was 14,150 [TB 939, 941 and 945] which is a monthly target of 4,716; 772 To a certain extent I have also taken into account the benchmarks, being minimum performance standards originally contracted for and, regardless of the review provisions, having apparently remained unaltered. Whilst the 3000 gross connections per month first level breach figure would only yield a target of 9000, as opposed to 12,000, it is not particularly remote from the 12,000 figure and it seems to me, serves to give a certain credence to the 12,000 figure. 773 Also taken into account is the evidence as to the relevance of costs to acquire already set out. There is a sense in which it seems to me that setting a low target is likely to the decision makers to have been counter-productive to Vodafone. An attempt to discount this proposition is to be seen from the re-examination of Ms Blake. I do not however accept that there is any real assistance given to the court from the evidence given by Ms Blake as to how, in determining profitability of a customer, she looked at a range of factors including how much the customer was spending, how much it was costing to acquire the customer and how much it was costing to manage the customer. She referred to it being hard to be specific as to what target she would have said if zero was not a target, her evidence being that Vodafone would have had to look at some modeling as to connections, values, plans, and costs to acquire. None of this really advances the issue beyond raising further speculation. In any event I was not impressed with Ms Blake as a particularly reliable witness for the reason that throughout her cross-examination she seemed to favour, whenever possible, Vodafone's perceived interests. Her answers were also often not responsive. 774 But most importantly of all Ms Blake was not "the decision maker". She could only speak to her own perceptions and in doing so did not seem to me to give the court any really acceptable or creditable reasons for a finding that had zero not been a target, the target which would have been set would have been "a low number". What she meant by "a low number" was also quite opaque in the complex of circumstances which would necessarily have then obtained. 775 One further issue concerns the letter from Vodafone of 13 January 2003 already referred to in the judgment. Clearly it is appropriate to infer that the letter was written on legal advice. So much was conceded by the defendants' senior counsel in final address. However the submission advanced by the defendants senior counsel was that notwithstanding that this letter may be inferred as having been written on legal advice, it stands as an inter partes communication which must be regarded as a genuine reflection of the then stance by Vodafone. Why then should the court not appropriately also infer that had such advice been taken at or about the time when the nil targets setting agenda was first being discussed within Vodafone, precisely this form of advice in terms of the type of approach to take is likely to have been given? It is legitimate to infer that such advice may have resulted in a letter similar to that of 13 January and in that sense have involved making over generous offers in terms of going well outside Mobile's legitimate entitlements [as with the offer to take into account what Mobile might consider to be an achievable target]. Had such advice been given and such a letter been written, then Mobile may well have persuaded Vodafone, at least during the pendency of further discussions into the future, to select targets such as would permit Mobile to go forward as Vodafone's appointed direct marketing agent as provided for in the ASP, with a business plan with sufficient profitability to permit Mobile to survive and to go on in the hope and expectation that targets determined for future quarters may improve. And all of this notwithstanding that Vodafone may have had a legal entitlement to set a far lower target than Mobile might consider to be achievable. This is simply a further factor to be taken into account in applying the proposition that the principle earlier referred to does not require the assessment of damages to be based on a fiction disregarding the actual facts. And the letter clearly was an actual fact albeit written on legal advice. 776 The court also takes into account the fact that this is a case where Mobile, although it bore the burden of proving its damages a result of Vodafone's breach of contract as well as the amount of loss it had sustained, had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permitted. The plaintiff could not adduce precise evidence of what had been lost because of the nature of the case including the circumstance that Vodafone's decisions and decision-making processes in the hypothetical can only represent an estimation at best and one which is necessarily reached with virtually no assistance at all from Vodafone's witnesses. As Deane J pointed out in Amann, where the plaintiff by reason of the defendants breach-of-contract has lost a real and valuable chance of deriving a commercial profit from venture, considerations of justice require that the plaintiff be entitled to recover the value of the lost chance itself and that the defendant be not allowed to take advantage of the effect of his own wrongful act to escape liability. It would affront justice for the court to hold that the plaintiff was entitled to no compensation at all in respect of the breach-of-contract. The court bears the responsibility of assessing the damages as best it can even though there are difficulties and uncertainties in relation to the exercise. Claims 6 and 7 Damages – December 2001 Quarter 777 It is next appropriate to turn to examine Mobile's entitlement to damages in respect of the December 2001 quarter. 778 The claim is advanced in a context in which Mobile apparently actually connected 16 new subscribers during the December 2001 quarter, responding to earlier promotions. 779 The claim advanced is to damages as a combination of: · the lost BAM on the customers who ought to have been targeted; · the lost CTM during the December 2001 quarter on customers who ought to have been targeted; · the net present value, as at 1 January 2002, for the period from 1 January 2002 to 30 September 2008, of, the lost future CTM on the customers who ought to have been targeted; · actual overhead costs associated with assets acquired by Mobile to carry out acquisition activities which continue to be incurred notwithstanding that acquisition activities did not take place during the quarter ($1,117,980). 780 Mobile submitted in relation to the December 2001 quarter that, as for the September 2001 quarter, the quantum of the claim depended upon what assumption is to be made as to the number of connections which ought to have been targeted during the December 2001 quarter. The above finding provides the requisite assumption. I note in that regard that the damages on various assumptions as to connections levels per quarter are set out in Ex P4 (Joint Experts Report) at p7. Unpaid CTA 781 Vodafone takes issue with Mobile's claim for unpaid CTA. The proposition is that there is no liability in Vodafone to pay the costs of Mobile's 'idle' operations for the same reasons as those advanced in relation to Mobile's redundancy costs and already dealt with. Vodafone submits that these are not costs of providing 'Acquisition Services' as defined in the ASP. They are said to be costs that should be met by Mobile from its minimum guaranteed BAM payments, which Vodafone had been paying and Mobile has received for this and the following quarters. 782 A particular issue is taken by Vodafone in relation to the 'spotters fee' charged by Innovations pursuant to the Marketing Agreement dated May 1999. Vodafone makes the point that the first time a claim was made for this amount was in January 2003 for the amount of $200,000. Vodafone's submission is that that agreement ought to have been terminated at least by the time of the meeting on 2 August 2001, and not December 2002 as occurred. 783 In my view and applying conventional causation and remoteness of damage principles, Vodafone is liable to pay the costs of the unpaid CTA insofar as Mobile's 'idle' operations are concerned. Once Vodafone has breached the ASP in terms of the Nil target regime, these are costs shown to have flowed from and to have been caused by Vodafone's breach of contract. One is now no longer dealing with the proper construction of the ASP so that the question is not resolved by the holding in the above reasons to the effect that the exercise of making employees redundant could not be said to have involved the "Acquisition and connection of New Subscribers" to Vodafone's network [cf The definition of "Acquisition Services" under the ASP (1/ 134)]. A breach of contract now having been proved, the court is now in the raw area of examining causation and damages. The holding is that save for the 'spotters fee' charged by Innovations pursuant to the Marketing Agreement, Mobile has made good its claim to the unpaid CTA. However in relation to the 'spotters fee' it seems to me that there is substance in Vodafone's submission that this agreement ought to have been terminated by early August 2001. 784 In the result, save in relation to the Spotters Fee, and the matter which is referred to immediately below, Mobile has made good its claim to damages. 785 The qualification to which I have just referred concerns whether the resultant figure should be discounted for the possibility that 12,000 connections would not have been able to be achieved. In that regard the court takes into account all of the evidence as well as Mobile's past record. 786 In particular the court takes into account the submission advanced by Vodafone to the effect that on the evidence it ceased to have available post paid consumer plans at material times. The proposition was that the value of the opportunity which Mobile had lost could be seen to be negligible because there were simply no appropriate plans available during the December 2001 and following quarters. It substantially relied upon a suggested admission by Mr Tales. [Transcript 764] 787 It is of course clear from clause 2.4 of the ASP that the agreement concerned only the parties relationship with respect to the acquisition and management of subscribers on a post paid basis [cf the definitions of "Subscribers", "Existing Subscribers", "Active and New Subscribers"]. 788 The court's finding of fact is that the evidence as a whole simply does not disclose that Vodafone ceased to have available post pay consumer plans. Indeed the evidence is to the contrary. Vodafone continued to have such plans after September 2002: an Options product with a $29 access fee and $44 in free calls was introduced in August 2002 and remains available. More importantly, the No Plans products-similar to V. Mobile-have been available since October 2001 and were for both pre and post pay (affidavit Ms Blake 4 December 2002 paras. To 208-229; affidavit Ms Moussa 25 February 2003 annexure L at p. 17). 789 On the evidence there was nothing to stop Mobile from selling post pay plans. And on the evidence Vodafone continued with the marketing of precisely such plans. 790 It is appropriate to add that in my view the term "credit facilities" in the definition of subscriber is not a reference to credit cards but to the credit facility which will subscribers receive who happen to be post pay. 791 In the result there is no substance in the Defendants submission that the value of the opportunity which Mobile had lost was negligible because there were simply no appropriate plans available for sale by Mobile during the December 2001 and following quarters. 792 It does seem to me that in all of the circumstances the resultant figure requires to be discounted for general vicissitudes and contingencies including of course the possibility that 12,000 connections would not have been able to be achieved by Mobile. To my mind the appropriate discount should be by way of a 10 percent reduction. Damages - Subsequent quarters - March, June, September, December 2002; March 2003 793 Mobile claims: (a) the lost BAM and the lost future CTM for the customers it would have connected during the subsequent quarters had a proper target been set and a business plan agreed; and (b) actual overhead costs associated with assets acquired by Mobile to carry out acquisition activities. 794 Similarly to the September and December 2001 quarters Mobile claims damages for each of the March 2002 – March 2003 quarters as a combination of: (a) the lost BAM on the customers who would have been targeted; (b) the lost CTM during each quarter on customers who would have been targeted; (c) the net present value, as at the commencement of the following quarter, for the period from the commencement of the following quarter to 30 September 2008, of the lost future CTM on the customers who would have been targeted during each quarter; and (d) actual overhead costs associated with assets acquired by Mobile to carry out acquisition activities and which continue to be incurred notwithstanding acquisition activities did not take place during the quarter: (i) March 2002 $539,407 (TB1329) (ii) Jun 2002: $366,908 (TB1330Z(xli)) (iii) Sep 2002: $330,897 (TB1330Z(xli)) (iv) Dec 2002: $567,728 (TB1330Z(xlviii)) (v) Mar 2003: $300,000 (assumed @ $100,000 per month). As for the September and December 2001 quarters, the quantum, other than the objective CTA claims, depends upon what assumption is made as to the number of connections which would have been targeted during the respective subsequent quarters. That assumption has now been given. The experts in Ex P4 have given their agreed assessment. 795 Insofar as each of the quarters following the December 2001 quarter are concerned it will be necessary to approach the matter in the fashion which has already been outlined concerning the December 2001 quarter. In short, as before the resultant figure in respect of each of these quarters requires to be discounted by 10 percent for general vicissitudes and contingencies including the possibility that 12,000 connections would not have been able to be achieved by Mobile. 796 The parties will require to revisit the precise damages award to be made by reason of this judgment. Leave is granted to the parties to address submissions on any particular matter which remains to be dealt with. Dealing with the disparate cases otherwise than the nil target issue 797 Having now dealt with the nil target issue insofar as it concerns the December 2001 Quarter and the later quarters it is now convenient to travel through the disparate other cases. Whilst it has been necessary in dealing with the December 2001 and later quarters issues to take into account adjectival material in terms of the evidence and certain factors which arise in relation to the June 2001 Quarter [Claim 4] and in relation to the September 2001 Quarter [Claim 5], the convenient course seems to me to simply deal with these claims seriatim. Additional Customer Management Agreement [Claim 1] 798 The nature of the claim was outlined early in the judgment. [cf paragraph 70 et seq] 799 There cannot, it seems to me, be any doubt about existence or terms of the agreement which was in writing [3/ 559]. The nature of the obligations in the agreement 800 Vodafone put forward a submission in terms of the proposition that a close examination of the agreement discloses the parties having contemplated that Vodafone might not elect to choose any of the three options referred to in clause 2 of the agreement. There is no substance in this submission. The effect of clauses 2 and 4 of the agreement was not to give Vodafone a choice as to whether or not it would transfer the 30,000 additional customers to Mobile. The agreement clearly discloses obligations resting upon Vodafone set out in clauses 1 and 2. Properly construed the commencement of clause 4 in terms of use of the words "[s]hould Vodafone choose one of the migration options outlined above" does not give Vodafone a choice as to whether or not to choose one of those options but an election only as to which of those options was to be chosen by it. The repudiation of the agreement 801 The evidence makes quite plain that Vodafone later [see for example the letter of 2 May 2000 (3/ 578)] announced to Mobile that migration of the subscribers was not a viable option. This was a clear repudiation of the agreement. 802 The subsequent correspondence makes plain that Vodafone continued with the same stance as time after time Mobile complained about the matter, going the distance by its letter of 19 May 2000 of suggesting that it was giving consideration to its legal rights i.e. commencing proceedings. 803 It is true that a question arose, apparently for the first time in the pleadings and during the hearing, in terms of a possible misunderstanding between the parties. Clearly the letter/agreement did provide that should Vodafone choose one of the migration options outlined in paragraph 2, Mobile would use best endeavours "to transition all (current and migrated $10 monthly bill customers) to quarterly billing by 1st July 2000 ". The cross-examiner put to the relevant Mobile witnesses that this clearly and in terms referred to every current and migrated monthly billed customer. Both Mr Bramwell and Mr Marchbank under cross-examination expressed the view that what was intended was a reference only to the migrated customers. 804 The question of whether and if so to what extent all current $10 monthly billed customers had been transitioned to quarterly billing by 1 July 2000 is not to the point. [cf evidence of Mr Marchbank – transcript 365.34] The evidence shows that Vodafone over Mobile's continued complaints, simply point blank repudiated the agreement. In short the timeline is such that the question of whether or not it was a term of the agreement that should Vodafone choose one of the migration options, Mobile would use its best endeavours to transition all such customers to quarterly billing by 1 July 2000 is essentially irrelevant to Vodafone's breach. The occasion was never reached when Mobile may have been obliged to use those best endeavours accordingly. Vodafone's submission represents an attempt to outflank Mobile's obvious entitlement to claim both repudiation and breach of this agreement. It goes nowhere. 805 Nor does Mobile, for much the same reason, achieve some particular end by its allegation that was a term of the agreement that effective from 1 July 2000 Mobile had agreed to charge Vodafone $4.75 for all quarterly billed customers and $7 for all monthly billed customers excluding the cost to manage rates for lower tariff customers. Here again the same position applies. By well before 1 July 2000 Vodafone had repudiated the Additional Customer Management Agreement in terms such as meant that any otherwise obligations of Mobile effective from 1 July 2000, simply fell away in the face of that repudiation. 806 The evidence does not establish that the Additional Customer Management Agreement was terminated by oral agreement between the parties. No such agreement is shown to have been reached. The pleaded oral agreement said to have arisen in meetings of May or June 2000 is not shown to have been established by those meetings. Mr Ogrin disowned the suggestion of any such agreement. In fairness to the defendants Mr Bathurst did concede in final address that it was extremely difficult on the evidence for the defendants to make good the proposition that there was a formal agreement to discharge the Additional Customer Management Agreement [Transcript 1407]. At the same time the defendants determined in final address not to press the estoppel claim. These forensic decisions were prudently made in the circumstances. Nothing in Mobile's proven conduct made good the proposition that it ever represented to Vodafone that it would not require Vodafone to comply with its obligations provided for under the Additional Customer Management Agreement. Nor was Vodafone's failure to transfer the additional 30,000 customers proven to have taken place in reliance upon any belief that such representation by Mobile. 807 In the result the claim by Mobile succeeds Damages 808 The issues in terms of damages flowing from the breaches of the ACM Agreement may be discerned from their respective written submissions. The plaintiff's written submissions 809 The plaintiff's final written submissions that the manner as follows: · MI claims the lost future CTM, for the period from 1 July 2000 to 30 September 2008, on the customers who were to be transferred [Gower report of 13 June 2002 (Gower 1) para 186 – 210]; · The net present value of the claim, as at 1 July 2000, is $2,634,621 [Ex P4 (Joint expert report) at p2, adopting Gower report of 10 February 2003 (Gower 2) Annexure B-O (updating Gower 1 para 209], on the assumption that 90% of the customers to be transferred would be monthly customers and 10% would be quarterly customers – approximating the quarterly/monthly profile of the MI customer base [Gower 1 para 202; and Annexure C5 showing 15,923 customers out of 166,381 = 9.57% as at December 2001]; · It was put to Gower that if less than 50% of the customers transferred were brand new, the quantum of damages would reduce because those customers would come off contract earlier and the churn rate would chip in at an earlier in time (Gower Tr 994/44-995/7); · Although Vodafone did not in its affidavits give any evidence of what the probabilities were in this regard, the probabilities must be that the higher proportion would be new customers because Vodafone would be keen to avoid a churn war. One of the substantial risks of migrating customers who had already been migrated would be the risk of severe churn. See in this regard the exchange of emails on 27 April 2000 between Mr Wisbey and Mr Hanrahan (TB565A). Vodafone would also have preferred to limit the loss off our base (TB565A); · Gower was cross-examined on this claim (Tr 993-5). Vodafone put no alternative assumptions in its evidence; · Gower was also cross examined on whether he took into account the financial effect one way or another of the differential between the rates in paragraph 3 of the ACM agreement and the rates in clause 2.2(g) of the Amendment Agreement (TB369) (Gower Tr 994/28-42); · The answer to this is that clause 3 of the ACM Agreement provides "This excludes current cost to manage rates for low tariff customers as per detailed in the amendment agreement". The arrangement for the 30,000 additional customers was separate and distinct to the ASP agreement and accordingly Gower was correct in not taking into account the differential. Vodafone's submissions 810 Vodafone put the manner as follows in its final submissions: · If it be assumed (contrary to the preceding submissions) that Vodafone was in breach of the ACM Agreement, the starting point for the assessment of damages is quantification of the loss suffered by Mobile in respect of lost management fees for the 30,000 customers that should have been transferred. Mr Gower has calculated the loss on the basis of four key assumptions: (1) the 30,000 customers, when transferred, would remain as customers of Mobile for the period of their contract, and thereafter, potentially until 2008, subject to the usual allowance for churn and the other assumptions built into his business model; (2) that the ratio of customers to be transferred from Vodafone to Mobile would be 90% monthly and 10% quarterly billed customers; (3) that 50% of customers to be transferred to Mobile would be new Vodafone customers, in respect of whom, no churn would apply for a period of two years; whilst the remaining 50% of customers would have contract expiry dates which approximated the expiry dates contained in the then existing Mobile customer base; and (4) that Mobile would be paid a monthly management fee of $7 for the monthly billed customers transferred to Mobile. · The difficulty with the first assumption is that it assumes Vodafone would allow customers to remain on the $10 Plan continuously until the end of the ASP Agreement. Under clause 7.4 of the ASP Agreement, Vodafone has an absolute right to withdraw plans at any time, or to change the terms on which plans were offered. The evidence reveals that Vodafone was particularly concerned about the unprofitable nature of the $10 Plan, thus rendering it likely that Vodafone could or would prevent customers from continuing to remain on a $10 Plan even after their contract plan had expired. These are all matters to be taken into the discount for contingencies in accordance with Sellars v Adelaide Petroleum (1994) 179 CLR 332, and would produce a substantial discount on any damages awarded to Mobile in respect of this claim. · The second assumption made by Mr Gower, and one which has been expressly modelled in the Agreed Experts' Statement, is the ratio of quarterly billed to monthly billed customers. There is no factual foundation for this assumption on the part of Mr Gower. · Mr Gower has assumed that Mobile would be paid a management fee of $4.75 in respect of the 3,000 quarterly billed customers to be transferred to Mobile. · However, Mr Gower has assumed that the remaining 27,000 customers (ie. 90% of the 30,000 customers) to be transferred would be monthly billed customers. He has assumed that these customers would attract a monthly management fee of $7.00. This ignores the fact that Vodafone had identified 21,000 customers that were connected on $10 and $15 Plans which it proposed form part of the customers to be transferred to Mobile [3/565A, 3/575A]. As these customers had monthly access fees of less than $20, Mobile would be only legally entitled to be paid the lower management fee of $5 under the ASP Amendment Agreement [2/369]. · Further, Mr Gower has made no allowance in this assumption for clause 4 of the ACM Agreement which required Mobile to use its best endeavours to "transition" the $10 monthly billed migrated customers to quarterly billing. · Mr Gower's assumption that 90% of the customers were on monthly billing is inconsistent with Mobile's evidence in any event. Mr Bramwell gave evidence that "pretty well all the $10 call subscribers of Mobile Innovations were being billed quarterly" [Bramwell XX T203/45]. Marchbank gave evidence to the same effect [Marchbank XX T365/34]. Stonell's analysis of the data base as at 30 June 2000 revealed a proportion of quarterly billed to monthly billed customers for the $10 Plan. · The agreed expert statement reflects the significant reduction in damages that would otherwise be available to Mobile if the assumption of 90% quarterly to 10% monthly is made, when compared to the assumption made by Mr Gower. The Court, therefore, should proceed on the basis of the assumption in favour of quarterly billed customers, rather than Mr Gower's assumption in favour of monthly billed customers. · The third main assumption made by Mr Gower in respect of the 30,000 customers concerned the profile of the customers. There is no justification for Mr Gower to assume that 50% of the customers would be new customers, and hence the management fee that would be earned by those customers would continue for at least a further two years after 30 June 2000, without being effected by churn. This is clearly an assumption favourable to Mobile, which has no basis in fact and is contrary to the fact that Vodafone had identified 21,000 customers that were connected on $10 and $15 Plans which it proposed be part of the transfer to Mobile [3/565A, 3/575A]. · The profile of the 30,000 customers to be transferred is pure speculation on the part of Mr Gower and Mobile. To the extent that it reflects an assumption favourable to Mobile, an allowance ought to be made in respect of the discount for vicissitudes on the basis that such an assumption was wrong. Failure to make allowance for the benefits to Vodafone under the ACM Agreement · As noted above, the consideration that was intended to be provided by Mobile to Vodafone concerned lower management fees for all customers being billed by Mobile on a quarterly basis. The lower rate of management fees proposed was not limited in time, but was applicable to all quarterly billed customers of Mobile from 30 June 2000 onwards. This was potentially a very significant benefit to Vodafone which could well have outweighed the damages suffered by Mobile for any breach of the ACM Agreement. It is not possible to model this saving to Vodafone into the future, because of the difficulties associated with making assumptions not only about the size of the customer base of Mobile in future periods, but also in relation to the assumptions as to which of the customers would be billed quarterly and which of the customers would be monthly. This is a further matter which the Court should take into account when settling the discount for vicissitudes in respect of the discounting of any damages awarded to Mobile in respect of this claim. Summary · In conclusion Vodafone submits that: - it did not breach any obligation to transfer the 30,000 customers as at 30 June 2000, in which case the claim ought to be dismissed; - alternatively, if the Court finds that Vodafone did act in breach of such an obligation, the Court ought to: - assess damages on the basis of the assumption that 90% of the customers would be billed quarterly; and - discount that figure by a substantial factor for the vicissitudes set out above. Holding as to damages 811 The difficulties in terms of assessing damages which are raised are but another example of the problems where the Court must determine the hypothetical and has no particular assistance from the party which has breached the contract. That notwithstanding, there is substance in Vodafone's submission finding difficulty with a number of the assumptions upon which Mr Gower proceeded. In my view the appropriate holding, doing the best that the Court can on the information available, is that the assumptions which should be made are as follows: · that 70 percent of the customers would be billed monthly with the remaining 30 percent billed quarterly; · that the monthly billed customers would attract a monthly management fee of $7.00; · that Mobile would be paid a management fee of $4.75 in respect of the quarterly billed customers; and · that 50% of the customers would be new customers in respect of whom no churn would apply for a period of two years whilst the remaining 50% of customers would have contract expiry dates which approximated the expiry dates contained in the then existing Mobile customer base. 812 The Court has taken into account the difficulty that inheres in the circumstance that Vodafone, in having repudiated and breached this contract, it is not by any means clear that the 21,000 customers connected on $10 and $15 plans referred to at 3/ 565A and 575A, would certainly have been the customers to be transferred had this repudiation and breach not taken place. 813 Once the new modelling to reflect the above findings comes forward it will be necessary to discount the final figure by a further factor for vicissitudes as suggested in the submissions of Vodafone. The discount takes into account inter alia Mobile's obligations to transition all current and migrated $10 monthly billed customers to quarterly billing by 1 July 2000. The appropriate discount figure is ten per cent. 814 At the same time the parties will have leave to address in relation to the suggested error pointed up in MFI 20 on the last day of the hearing. V Mobile Plan [Claim 2] 815 As already made plain, the defence to this claim was withdrawn during final address. The verdict for the plaintiff will be in the sum of $653,000 [see MFI 21] plus such amount as is necessary to update that figure to the date of judgment. MC 9 dispute [Claim 3] 816 The general nature of the dispute was outlined early in the judgment. [cf paragraph 58 et seq] 817 It is important to keep in mind closely the manner in which this claim was pleaded. The pleading alleged an oral agreement to vary the ASP. This is said to have been an agreement reached on or about 19 July 2000 during a meeting held between Mr Marchbank, Mr Ogrin and Mr Wisbey. 818 On the day following this meeting a letter was sent by Mr Marchbank to Mr Ogrin which did not refer to any special deal being proposed by Mobile or agreed to by Vodafone in respect of the Management fees relating to the MC 9 Plan. 819 Internal Vodafone approval was subsequently sought on 21 July 2000, a copy of which was forwarded to Mr Marchbank [3/609O]. No mention was made at this time of any special deal in relation to the management fee to be paid to Mobile for customers on the MC9 Plan. 820 On 28 July 2000 Ms Jones of Mobile sent an email seeking confirmation of details associated with the MC9 Plan to Vodafone. There was nothing in this email which sought confirmation of an agreement to amend the existing regime in relation to the payment of management fees for the MC9 Plan [4/617M]. 821 Mobile initially loaded the MC9 Plans onto Plan 3 on Vodafone's wholesale billing platform [Ms Moussa (6.12.02) para 43; 4/617A]. At that time, Mobile was aware that Vodafone paid Mobile the lower management fee for customers connected onto Vodafone's Plan 3 [3/604G]. In September, Mobile was paid the lower cost to manage for customers connected to the MC9 Plans [Ms Moussa (6.12.02) para 45; page 5 of Ms Moussa (25.2.03)]. 822 The subsequent correspondence and conversations are generally detailed in appendix XX. They included inter alia the matters set out in the following paragraphs. 823 On 7 November 2000, Mr Mitchell of Vodafone sent an email to Mobile indicating that Vodafone would pay the higher management fee for customers on the MC9 Plan, but that Vodafone would review the spend of those customers over the succeeding months [4/653]. Mr Stonell admitted that he was content with Mr Mitchell's proposal: "Q. Mr Mitchell made it clear to you, did he not, that any future payment of the CTM would depend upon whether the $9 plan continued to meet the $30 threshold? A. Yes. Q. In fact he sent you an e-mail to that effect, suggesting that issue would be reviewed over coming months? A. Yes. Q. And you didn't - you were content with that proposal from Mr Mitchell, were you? A. At that point in time, yes ." [Mr Stonell XX T 626/25 - 37] 824 This is an important concession in the circumstances. 825 On 30 November 2000 Mr Mitchell sent a letter from Vodafone to Mr Stonell setting out the CPI rate adjustments and restating Vodafone's position in relation to the BAM, CTM and other matters [4/661]. That letter included a statement that Vodafone would pay $5.67 CTM per customer for "Monthly Billed Customers – Low Access Plans". The Low Access Plans were not defined exhaustively and no reference was made to the MC9 Plan. 826 Following receipt of the letter of 30 November 2000, Mr Stonell contacted Mr Mitchell about the MC9 Plan. Mr Stonell gave evidence about this conversation as follows: "Mr Stonell: "Your letter does not expressly state the CTM for the $9 plan. Can you please confirm that we are receiving $7.67 on the $9 plan?" Mr Mitchell: "The current spend is about $29 or $30 so we will pay you the higher CTM . I will send you an e-mail." [Mr Stonell, 25.06.02 para 46] 827 The e-mail of 5 December 2000 from Mr Mitchell, far from supporting the proposition that the parties had in relation to this matter agreed to vary the ASP, does no such thing. Upon examination this e-mail merely confirms the continuance of the informal arrangement further making the point that the entitlement to the CTM depended upon the spending level of customers which might vary from time to time. 828 During the course of final address Mobile sought to move away from its pleadings to submit now, for the first time, that insofar as writing might be necessary, the agreement was in writing [relying upon the e-mail from Mr Mitchell of 5 December 2000] and also seeking to rely on a further conversation of 28 July 2000 between Mr Marchbank, Mr Ogrin and Mr Wisbey in relation to the CTM for the $9 plan. The pleading was not amended and this approach therefore falls outside the pleading. 829 Mobile has not proven the amendment to the ASP which it asserts was achieved in relation to the MC 9 Plan. It has however proven a somewhat informal arrangement which had been agreed to. That informal arrangement once agreed upon was also actioned. A parameter of the informal arrangement which had been agreed upon was that any future payment of the CTM would depend upon whether the $9 plan continued to meet the $30 threshold. 830 In the result: · the proposition that it has been shown that a binding agreement had been reached between the parties which could not be reviewed by Vodafone is rejected; · that review could by dint of the informal arrangement, take place at Vodafone's discretion depending upon whether the $9 plan continued to meet the $30 threshold; · that discretion is seen to have been exercised when Vodafone determined to pay: - only the lower CTM for February 2001 on the Mobile Plan 9 PSTN and on the Mobile Plan 9 'three months free Plan' [paying however the higher CTA for customers on the Mobile Plan 9 400 mins Plan]; - the lower CTM for customers on all of the MC 9 plans for the months from March 2000 until November 2002. 831 Even if this be incorrect, Vodafone would in any event have been entitled under the terms of the ASP to review this informal arrangement in due course. Leave to address further submissions 832 The parties will be given an opportunity to address what result flows from this finding. June 2001 [Claim 4] 833 The general nature of the claim has been outlined earlier in this judgment [cf paragraph 80 et seq] 834 The central issues concern: · whether or not the June business plan was agreed to between the parties; · if so, whether or not the $15 Plan, Vodafone Direct and affinity programs to be provided by Vodafone were elements of that business plan; · if so, whether or not an implied term of the ASP obliged both parties to carry out their best endeavours to do whatever was reasonably required by each of them to give effect to a business plan which had been agreed to; · if so, whether or not Vodafone breached the implied term by failing to provide the $15 Plan, by failing to provide branding guidelines for the use of the Vodafone Direct brand and by failure to provide Mobile with information on Vodafone's Affinity programs; · if so, whether or not Vodafone has been able to prove causation and loss and if so in what amount. 835 In my view the evidence and the proper approach to the application of the relevant principles clearly leads to an affirmative answer to each of the above questions. 836 Regrettably this is one of those areas where a fine examination of the chronological detail is necessary and where it is extremely difficult for the reader to quickly extract the evidence pertinent to this claim from the mass of the detailed communications between the parties set out in the separate Evidence Volume. 837 Generally the submissions by Mobile are adopted as correct in what follows by way of an accurate summary in drawing together the relevant evidence. " FACTUAL NARRATIVE A. The June quarter CTA Long term plans and drive for growth: Jun – Dec 2000 1. The June 2001 Quarter dispute has its genesis in events at least 12 months earlier. From the time he commenced at Mobile Innovations Mr Marchbank sought to obtain from Vodafone some consistency and long term planning in its direct marketing requirements. 2. On 25 May 2000, after meeting with Mr Ogrin, Mr Marchbank wrote to Mr Ogrin setting out a strategy for obtaining 9,000 connections per month at a CTA of $540 using a combination of off-the-page, e-commerce, TV, member-get-member and affinity programs (TB596-8). 3. On 2 June Mr Ogrin responded that a more realistic forecast for off-the-page was 6,000 per month which would be supplemented with a CBA affinity program for 60,000 connections (6,667 per month) (TB601-4). Five days later he provided a 9 month forecast from July 2000 to March 2001 which had reduced the off-the-page forecast to 49,000 (5,444 per month) and the affinity forecast to 18,000 (2,000 per month) (TB604A-B): Jul Aug Sep Oct Nov Dec Jan Feb Mar Total Off the page 6,000 6,000 6,000 6,000 7,000 4,000 4,000 6,000 4,000 49,000 Affinity 500 1,000 2,000 2,500 3,000 3,000 1,000 2,000 3,000 18,000 Total - monthly 6,500 7,000 8,000 8,500 10,000 7,000 5,000 8,000 7,000 67,000 Total - quarterly 21,500 25,500 20,000 4. However, by early July Vodafone's "strategy" had changed again. Both Mr Clubb, Vodafone's Director of Sales and Channel Management, and Mr Ogrin informed Mr Marchbank that Vodafone's new strategy was to drive for growth with the aim of becoming number two in the market. Mr Clubb suggested that MI should be targeting at least 8,000 per month (Marchbank 22/5/02 para 56, 77; Ogrin 22/11/02 para 120). 5. Thereafter, until December 2000, targets increased and MI geared up its business accordingly (Marchbank 22/5/02 para 78). Throughout the period to December 2000 Vodafone continued to assure MI that the drive for growth was continuing (Marchbank para 78-80). For the six months to December 2000 the targets and connections were: Jul Aug Sep Oct Nov Dec Target – cnnxns* 8,300 12,400 7,200 Actual - cnnxns 4,328 8,116 10,573 9,028 12,325 8,239 Target - by quarter* 26,500 27,900 Actual - by quarter 23,017 29,592 Target – CTA* $472.30 $472.30 $472.30 $455.49 $442.51 $486.35 Actual - CTA $579.31 $504.55 $484.86 $458.03 $430.25 $487.37 TB for actuals TB1857 TB1869 TB1879 TB1893 TB1902 TB1912 * The CTA worksheet for Sep quarter is at TB1373; The CTA worksheet for Dec quarter is at TB1375-9 CTA for March and June 2001 quarters determined concurrently 6. On 15 November 2000 Vodafone notified MI of the target for the March 2001 quarter as 24,000 (TB656). Mar 2001 Qtr Jan Feb Mar Total Target - cnnxns 6,500 8,000 9,500 24,000 7. However, on 12 December 2000, only 2 weeks before the commencement of the March 2001 quarter, and before the CTA business plan for that quarter had been agreed, Vodafone notified MI that connection targets for the March 2001 quarter were to be reduced "by at least 25%" (Marchbank 22/5/02 para 81). Formal notification was given the next day - the drop was to 19,105 (January – 5,500; February – 6,560 and March – 7,045) (TB679). Mar 2001 Qtr Jan Feb Mar Total Target - cnnxns 5,500 6,560 7,045 19,105 8. MI expressed dismay at Vodafone's volte face, which posed significant problems for MI to gear down for the lower level of connections (Marchbank 22/5/02 para 83; TB679; TB703). 9. On 12 January 2001 Vodafone made a proposal to address the "impasse" on the March 2001 quarter CTA business plan by coming to an arrangement for both the March and June 2001 quarters concurrently, so that any connections made during the March quarter in excess of 19,000 would be "rolled over" to the June quarter. Vodafone did not wish the excess connections to "see the light of day" in the March quarter (TB718). For this purpose June quarter target would be 23,000 (TB710). Jun 2001 Qtr Apr May Jun Total Target - cnnxns 7,000 8,000 8,000 23,000 10. MI agreed with the proposal for joint setting the March and June targets at a meeting on 24 January 2001 (Marchbank 22/5/02 para 85). Indeed, that was consistent with MI's long stated desire for Vodafone to introduce some long term planning into the relationship (cf TB703-6 where Mr Clubb acknowledged the desirability of formulating a 12 month plan). 11. The position of 19,000 connections for the March 2001 quarter and 23,000 connections for the June 2001 quarter was formally confirmed by Mr Webb, Finance Director, and Ms McDonald on 31 January (TB726) and 1 February (TB729-30) respectively. The March 2001 quarter CTA business plan (TB1380-7) was prepared on the basis of the 19,105 connections which had been notified on 13 December 2000. 12. In the middle of February 2001 the position started to unravel. On 21 February Ms McDonald confirmed the March quarter target as 19,000 (curiously, with different monthly allocations) (TB753). Vodafone reneges on concurrent target for June quarter 13. However, in response to MI's request for confirmation of the June quarter target, Ms McDonald simply replied on 23 February "Will come back to you on June quarter as I believe this is being agreed at the moment" (TB760). The same day Mr Stormon advised that the "provision … for rollover into the June quarter is … not available as per [Ms McDonald's] advice to withdraw the deferred funding and all associated arrangements" (TB762). Perhaps understandably, MI took exception to this further renege (TB760, 762). 14. On 27 February 2001 Ms Statham provided the first draft CTA business plan for the June 2001 quarter (Version 1), adopting the 23,000 target, to Vodafone (TB764-5). Under this plan 600 were allocated to affinity programs and 22,400 to MI plans. As to the latter, Ms Statham observed that, by not allocating the marketing budget to individual plans M! could retain some flexibility over the quarter. Jun 2001 Qtr (V1) MI V/D Affinity Target – cnnxns (23,000) 23,400 600 Target - % 97% 3% 15. On 28 February 2001 the unravelling position accelerated. Mr Brown, Vodafone's Executive General Manager (Consumer) Sales, advised MI that its target for the entire 12 months commencing April 2001 would be reduced to 12,000 (1,000 per month) (Marchbank 22/5/02 para 89), that Vodafone was interested only in high ARPU customers and that the proposed CTA for 23,000 was unacceptable. MI pointed out that the targets had been the subject of agreement with both Mr Webb and Ms McDonald (TB767-8) 16. On 7 March 2001 Mr Brown confirmed the 12 month 12,000 target and drive for high ARPU customers. He further advised that the entire 12,000 should be connected in the June 2001 quarter (TB775). 17. MI escalated the dispute by meeting with Mr Clubb on 9 March (Marchbank 22/5/02 para 96), arranging for its solicitors to write to Mr Bissex, Vodafone's Managing Director, on 9 March TB790-1) and writing to Vodafone Pacific's CEO, Dr Clark on 15 March (TB831). Within days Mr Bissex had resigned (TB831). 18. On 16 March 2001 Vodafone's solicitors responded, asserting that a "dispute" had arisen in relation to the June quarter CTA and suggesting that the procedures set out in the ASP agreement be followed (TB833-4). Mr Townsend, Vodafone's Finance Director who had replaced Mr Webb, was appointed as Vodafone's representative for the dispute resolution process (TB837). 19. Meanwhile, on 13 March 2001 Ms Statham had provided a redraft of the June 2001 quarter business plan (Version 2), with an increased numbers on the high access fee plans, to Mr Stormon (TB830B-C). Jun 2001 Qtr (V2) M!9 M!11 MC17 MC22 MC33 V/D Affinity Target – cnnxns (23,000) 3,250 3,050 3,500 5,500 6,500 1,200 Target - % 14% 13% 15% 24% 28% 5% 20. On 20 March 2001 representatives from Vodafone (Ms Blake, Ms Larkin, Mr Clubb and Mr Townsend) and MI (Mr Marchbank and Mr Stonell) reviewed Ms Statham's Version 3, which increased the targets for the high access fee plans and affinity programs and required that the higher plans be marketed under Vodafone Direct (TB843A-G). Jun 2001 Qtr (V3) M!9 M!11 MC17 (VD) MC22 (VD) MC33 (VD) V/D Affinity Target – cnnxns (23,000) 1,500 1,500 2,100 5,350 8,800 3,750 Target - % 7% 7% 9% 23% 38% 16% 21. During the meeting Mr Townsend said that the target for the June quarter must be limited to 19,000, irrespective of the prior agreement with Mr Webb for 23,000 (Marchbank 22/5/02 para 100; TB842-3). Mr Townsend also said that Vodafone was removing all plans less than $17, including the M!9 plan (Marchbank 22/5/02 para 100; Blake 4/12/02 para 172). 22. Following the 20 March meeting Mr Townsend, on 21 March 2001, sent a letter and revised CTA worksheet for 19,000 customers at an average CTA per customer of $555.85 (Version 4) with a predominance of customers on MC22 and MC33 plans. The letter sought to impose conditions on MI's use of the MI9 and MI11 plans, by prohibiting advertising beyond 1 April and prohibiting connections beyond 30 April (TB851-7). 23. MI responded on 22 March by observing that Vodafone's proposed CTA worksheet was entirely unrealistic – the offers were not competitive, the marketing spend would attract only 5,000 customers pushing the average CTA per customer to $1,246 and advertising had already been placed for April (TB862-6). MI prepared Version 5 of the June quarter CTA worksheet to demonstrate those points. 24. MI's view was that the move to plans above $17 would need to be made gradually if it was to be successful. MI's marketing staff set about devising a strategy to that end (Statham 2/9/02 para 24). MI devised a $15 plan to fill the gap between the MI9 and MI11 plans on the one hand and the higher plans on the other, which were the plans currently available to MI. 25. The proposed MI15 plan, together with a number of other initiatives designed to attract customers to higher fee plans, was presented by MI (Mr Marchbank and Ms Statham) to Vodafone (Mr Stormon and Ms Blake) on 29 March 2001 (Marchbank 22/5/02 para 105; T897-906). MI proposed that the $15 plan would include a monthly line rental of $15 but with call rates equivalent to the $9 plan (Marchbank 22/5/02 para 105). It would be marketed under the M! brand. Ms Statham pointed out that more expensive call rates would make the plan uncompetitive (Marchbank 22/5/02 para 105). Other proposals included to market all higher plans using Vodafone Direct, to introduce new commission structures to further encourage sales staff to "upsell" customers to higher plans and to progressively increase the mix of higher value plans during the quarter based on testing. 26. Both the concept of a transition to higher value plans and the testing of a $15 plan, which might well be profitable, appears to have been a proposal acceptable to Vodafone (Blake Tr 874/1-875/20, 878/23-38). 27. During the presentation Ms Statham presented Version 6/mix 1 of the CTA worksheet showing 23,150 connections, with a predominance on M!9, M!11 and M!15 plans and an average CTA per customer of $451.40 (TB902). Jun 2001 Qtr (V6/1) M!9 M!11 M!15 MC22 (VD) MC33 (VD) V/D Affinity Target – cnnxns (23,150) 5,000 10,000 5,500 1,200 500 950 Target - % 22% 43% 24% 5% 2% 4% 28. The next day Ms Statham provided Version 6/mix 2 showing 19,000 connections and an average CTA per customer of $457.97 (TB907-13). Jun 2001 Qtr (V6/2) M!9 M!11 M!15 MC22 (VD) MC33+ (VD) V/D Affinity Target – cnnxns (19,000) 4,500 6,500 5,450 1,000 700 850 Target - % 22% 43% 24% 5% 2% 4% 29. MI immediately started planning on the basis that the M!15 plan would operate during the quarter – advertising needed to be booked (TB914). Had MI not done so then sales could not be achieved during the June quarter. Vodafone's delays meant lost opportunities – eg the April mailing to Innovations (TB925). 30. By a letter (TB928) received by MI late on 4 April, Mr Townsend approving Version 6/mix 2 (19,000 at $457.97) but with certain provisos including: We will need to make some modifications to the $15 plan you have nominated in order to give it some relativity with My Choice plans … This will be confirmed in line with the normal process of offer approval. 31. MI responded the next day by pointing out that Vodafone's delays had meant critical deadlines had been lost, that 19,000 connections was no longer realistic and that the target for the M!15 plan had to be reduced given that it was not yet confirmed. Further MI reintroduced the MC17 plan into the mix, observing that it had started placing that plan in the absence of approval for M!15. MI attached Version 7 of the CTA worksheet as a new proposal. It showed 14,150 connections at an average CTA per customer of $497.82 (TB939-940(iv); TB951-6) as follows: Jun 2001 Qtr (V7)* M!9 M!11 M!15 MC17 (VD) MC33+ (VD) V/D Affinity Target – cnnxns (14,150) 5,300 6,050 1,500 500 350 450 Target - % 37% 43% 11% 4% 2% 3% * The plan appears to inadvertently transpose MI15 as a Vodafone Direct plan with MC17 as an M! plan. 32. Vodafone accepted Version 7 on 6 April 2001 (TB945), thus finalising the June quarter CTA business plan. B. Approving the $15 plan 33. Under the ASP agreement a plan could not be marketed by MI until formal approval had been given by Vodafone – a fact alluded to by Mr Stormon in relation to the $15 plan at the 29 March presentation (Marchbank 22/5/02 para 105; Stormon 9/12/02 para 45 and 46). 34. On 20 April Mr Stormon updated Ms Statham with Vodafone's progress on obtaining approval for the $15 plan. He said that the analysis of "neighbouring plans" , necessary to establish "a basis for relativity of rates" would be completed by 23 April, at which time he would provide a proposed design to Ms Statham (TB964). 35. At some time during the latter part of April or early May Vodafone requested MI to carry out an analysis of SMS usage by MI customers, apparently because Vodafone was unable to do it and notwithstanding that MI had never had to do so before to obtain a plan approval (TB990-1; TB1006). MI continued to stress the urgency with which it was waiting for $15 plan approval (TB1008). By 18 May 2001 the $15 plan was with the Vodafone tariff committee for approval (TB1011). 36. On 18 May 2001 Mr Marchbank was informed by Mr Stormon that he had been retrenched (Marchbank 22/5/02 para 127; TB 1026, although Mr Stormon records his date of leaving Vodafone as 25 May). Apparently Ms Karpes took over some of his roles (TB1011) while Mr Oswald appears to have taken over others (TB1109, 1116). 37. By mid May Ms Statham had come to the view that it was not going to be possible to market the $15 plan during the June quarter – of course, it had not yet been approved by Vodafone (Statham 2/9/02 para 39). She then obtained Vodafone's permission to use the marketing expenditure allocated to the $15 plan in the June CTA worksheet to market the M!11 and MC17 plans for the remainder of the June quarter (TB1029, 1043, 1058). 38. Nonetheless Ms Statham continued to chase Vodafone for approval for the $15 plan – one reason being to ensure that marketing could be carried out in the next quarter (TB1078, 1109, 1112). 39. Mr Stormon accepted that he never got approval for the $15 plan and it wasn't approved in his time (Stormon Tr 1112/41). MI pressed and pressed for the $15 plan but it never emanated from Vodafone until after his time (Stormon Tr 1113/14). 40. On 8 June the "chainsaw hit" – Vodafone's officer in charge of tariffs (Mr Panos) objected to an aspect of the proposed $15 plan (relating to a level of "free" SMS) (TB1116) – affecting MI's planning for marketing (TB1120, 1122). 41. Mr Oswald notified Mr Marchbank and Ms Statham that he had "got approval finally for the $15.00 [plan]" , on 13 June 2001 and provided details (TB1124-6). However during the approval process the tariff had "increased considerably" from that applicable to the M!9 plan (TB1171) - a matter which appears to have escaped Mr Oswald's notice, before being raised by Ms Kenny of MI on 19 June (TB1172). 42. MI's started inquiring about this change on 20 June and pointed out that the tariffs were both uncompetitive with Optus and Telstra and a reversal of the original requirement for parity with the $9 tariffs (TB1171, 1178, 1189, 1198). Mr Oswald's response on 2 July 2001 was "Run with what has been signed off there will be no changes" (TB1194). 43. Mr Marchbank raised the same concerns with Mr Townsend in a letter dated 4 July 2001 (TB1199). Mr Townsend does not appear to have ever responded to this letter. 44. MI commenced marketing the $15 plan on 7 July 2001. It ran 77 media placements up until 15 September 2001 and connected between 1,364 (analysis of advertising schedules by Ms Moussa 25/2/03 para 18; "Summary of MI's Advertising and Results for 2001" schedule behind tab "99-01 Summaries") and 1,624 (Stonell 25/6/02 para 61) customers over that period. 45. MI ceased carrying out further marketing of all plans after 22 August 2001, after Mr Townsend accepted Mr Marchbank's advice that, in light of Vodafone's failure to provide a competitive $15 plan, Vodafone Direct branding guidelines or affinity programme information, continuing that expenditure would be wasteful (TB1250, 1252 and 1264; Marchbank 22/5/02 para 142). C. Vodafone Direct Introduction 46. "Vodafone Direct" is a trade name belonging to Vodafone. Mobile Innovations is permitted to use the "Vodafone Direct" name or brand only with express permission from Vodafone and in accordance with Vodafone's advertising and branding guidelines. (clauses 25.1, 25.2 and 25.3 of the ASP Agreement; TB144, 173-4 & TB144; T487.1; T520.27). 47. In the context of this action "Vodafone Direct" is a brand which can be used as a "distinct marketing label for identifying and selling mobile phone plans." (Statham 2/9/02 para 12). History of Vodafone Direct 48. Mobile Innovations wanted to advertise a brand, separate from the Mobile Innovations brand, that would target mid to high level subscribers (T292.23; T308.11; T351.20; T360.29; T420.38; T421.39; T434.10; T434.22; T434.44; T435.30; T437.12; T463.10; T529.23; T531.43; T536.51). The company considered, and later the marketing team at Vodafone agreed, that "Vodafone Direct" being a brand associated with a large telecommunications company, Vodafone, would achieve that aim (Statham 2/9/02 paras 14 and 15; T 904.35). 49. Accordingly on 21 December 1999 Mr Bramwell of MI sent Mr Day of Vodafone a proposal requesting the launch of Vodafone Direct, "targeting the mid to high level subscriber, offering mid range and premium handsets on higher call plans". (Bramwell 20/5/02 para 49; TB466-TB470 at TB469; T291.42-T291.49; T292.7; T292.24; see also T351.20; T420.38; T421.39; T434.22; T434.44; T529.20; T531.43; T536.51). A launch of the brand would have built market awareness (T540.5). 50. By the early part of 2000 Vodafone's main competitors, One.Tel, Telstra and Optus were conducting their direct marketing operations through the brands "Telstra Direct", "Optus Direct" and "One.Tel". By using these brands, Telstra, Optus and One-Tel were establishing a significant presence in the market place (Statham 2/9/02 para 13). 51. To meet the competition, on 12 January 2000, Mr Marchbank and Mr Bramwell gave a presentation to Mr Clubb and Mr Day of Vodafone suggesting the use of "Vodafone Direct" as a marketing channel. The Vodafone audience was not receptive to the suggestion. (Marchbank 22/5/02 paras 10 and 119; TB471-497 at TB482-484; T305.28; T308.8). The proposal was then shelved. 52. In March 2000 Mr Ogrin started working for Vodafone (Ogrin para 1). Mr Ogrin then started to develop a channel strategy which essentially adopted Mobile Innovations' earlier proposal (Ogrin para 90; Bramwell 13/2/03 para 6(l); Statham 12/2/03 para 5(l)). 53. Mr Ogrin then gave a presentation, which was followed by a letter, which suggested expanding the use of Vodafone Direct in "off the page" and "on-line banner advertising". (Marchbank 22/5/02 para 120, Ogrin para 95, TB578-579; TB563D-TB563R). Mobile Innovations embraced the resurrected use of the brand (Bramwell 13/2/03 para 6(n); Marchbank 14/2/03 para 4(m)). 54. On 25 May 2000, Mr Ogrin gave a presentation proposing the use of Vodafone Direct in off-the-page advertising. (TB598A-S at 598K). That afternoon Mr Marchbank sent a facsimile to Mr Ogrin suggesting that Mobile Innovations use the "Vodafone Direct" brand for off the page marketing for the period July 2000 to June 2001, with a forecasted acquisition rate of 2,000 connections per month. (Marchbank 22/5/02 para 120; TB596). 55. In response, on 2 June 2000, Mr Ogrin sent a letter to Mr Marchbank suggesting the use of "on-line banner advertising" and TV advertising to build brand awareness of Vodafone Direct. (Marchbank 22/5/02 para 120; TB601-604 at TB602). 56. Mobile Innovations started to use "Vodafone Direct" logo in "off the page" advertising commencing in June 2000 (Marchbank 22/5/02 para 120; TB1368-1399). 57. On 8 June 2000, Mobile Innovations made an announcement to the Australian Stock Exchange stating that "the roll out of both V.Mobile and Vodafone Direct is expected to provide a major stimulus to new subscriber growth." (TB604D; T360.26). 58. Ms Statham's evidence is that on several occasions she advised Vodafone to launch Vodafone Direct as a brand (Statham 2/9/02 para 15). She expected Vodafone to provide branding guidelines to enable a substantial marketing campaign (Statham 2/9/02 para 16). This was not done. Mobile Innovations tried to fill the gap with a series of ad hoc advertisements using the Vodafone Direct logo. (Statham 2/9/02 para 18, T545.24). The early use of the Vodafone Direct logo was not successful as the brand itself had not been launched (Buckley para 15; Statham 12/2/03 para 7(a)). 59. In December 2000, Mr Buckley of Vodafone sent Ms Kenny and Ms Statham of MI branding guidelines on the use of the Vodafone Direct logo (Buckley paras 22 and 23; T544.28). The guidelines did not enable the launch of the brand (T545.6-14). 60. In early 2001, Mr Buckley was instructed by Ms Davies (of Vodafone) that the December branding guidelines should no longer be applied to Vodafone's advertisements and marketing (Buckley para 24). Use of Vodafone Direct during the June 2001 Quarter 61. During the June quarter, Mr Marchbank and Ms Statham attempted to obtain Vodafone's permission to launch Vodafone Direct using Vodafone's branding guidelines. Mr Marchbank and Ms Statham were advised by Mr Buckley and Mr Clubb that the company was developing new advertising guidelines and Mobile Innovations had to wait the provision of those guidelines. (TB1143-1147, TB1153-1163, TB1182, TB1183, Statham 2/9/02 paras 31 and 32; Statham 12/2/03 paras 7(b) and 7(d); Marchbank 22/5/02 paras 100, 118 and 134; T458.23; see also Buckley para 28). 62. Mr Marchbank and Mr Stonell attended a meeting with Mr Clubb and Mr Townsend on 20 March 2001. Mr Marchbank stressed again the use of the Vodafone Direct brand to attract higher spend customers. Mr Clubb advised Mr Marchbank that anything Mobile Innovations did under the Vodafone Direct brand would have to be approved by Vodafone (Marchbank 22/5/02 para 100). 63. On 5 April 2001, the business plan for the June 2001 quarter was agreed. It included a plan proposing the acquisition of 2,300 subscribers using Vodafone Direct. (Marchbank 22/5/02 para 109; TB941). 64. The necessary branding guidelines were not provided during the June 2001 quarter and the brand was not launched. (Statham 2/9/02 para 16). Again advertising had to be done on an ad hoc basis (Buckley Tr 1116/43-50). During this period Vodafone "were in a bit of a dilemma" because "the new advertising campaign hadn't really started" (Buckley Tr 1116/43-50). 65. In an attempt to fill the lack of marketing Mobile Innovations' used the Vodafone Direct logo on some advertisements on an ad hoc basis (T538.56). 66. Only 5 Vodafone Direct promotions were carried out in the June 2001 quarter. No sales were achieved as a result of these promotions (Statham 2/9/02 para 30(b))…. D. Affinity programs Introduction 93. Affinity programs are marketing programs that are specially designed for the customers of another organisation known as an affinity partner, such as a financial institution, by arrangement with that organisation. It generally involves the marketing of a mobile phone plan which is not available to the general public. The advantage of affinity marketing is that marketing costs are lower per customer so that the saved costs may be allocated to formulating a more attractive deal for the customer (Marchbank 22/5/02 para 109(b); Statham 2/9/02 para 20). 94. To generate significant sales an affinity program has to be marketed to a large number of potential customers because recipients generally treat such offers as junk mail. An affinity program only has a short lifespan (Marchbank 22/5/02 para 114). 95. Between Mobile Innovations and Vodafone, there were three types of affinity partners (Statham 2/9/02 para 21): (a) partners with whom both Vodafone and Mobile Innovations had a relationship; (b) partners with whom only Mobile Innovations had a relationship; (c) partners with whom only Vodafone had a relationship 96. However, while Mobile Innovations had some affinity partners, it was largely reliant on Vodafone to introduce it to large corporations to enable Mobile Innovations to sell affinity plans to those partners and their customers (Statham 2/9/02 para 22; T547.45; T549.30 – T549.50). This was a fact acknowledged by Mr Ogrin, Mr Wisbey and Ms Blake of Vodafone (T559.36; T890.47). Vodafone employed Ms Khoo and subsequently Ms Karpes to organise affinity programs (Marchbank 22/5/02 para 115; T495.16). The largest affinity partner introduced by Mobile Innovations, was Innovations. See also Stormon at T1113.16-30. History of Mobile Innovations' Affinity Marketing 97. Historically, Mobile Innovations' marketed to customers on Innovations' database. Mobile Innovations generated a lot of sales through this affinity partner. (T552.30). 98. Then, in December 1999, Mr Marchbank was requested by Mr Day of Vodafone to develop a larger presence in "off the page" affinity marketing, even if that presence was at a higher cost to Vodafone. Mobile Innovations complied with that request. (Marchbank 14/2/03 para 4(k)) 99. In March 2000, Mr Ogrin started working for Vodafone (Ogrin para 1). He started to develop a direct marketing channel strategy for Mobile Innovations. The channel strategy included the use of "affinity marketing" (Ogrin paras 86 and 91). 100. In late April 2000, Mr Ogrin presented his channel strategy to Mr Bramwell, Mr Marchbank and Ms Statham suggesting " internal and external " affinity (Ogrin para 94; TB 563D-TB 563R at TB563G). 101. Subsequently, on 10 May 2000, Mr Ogrin sent a letter to Mr Marchbank espousing more aggressive campaigns to major affinity partners (Marchbank 22/5/02 para 114; TB 578-579). 102. On 25 May 2000, Mr Ogrin gave a presentation to Mr Marchbank, Ms Statham and Mr Stonell on the channel strategy Vodafone suggested Mobile Innovations adopt. The presentation built on the earlier presentation in late April 2000 (TB563D–563R). During the presentation, Mr Ogrin requested that Mobile Innovations focus on affinity marketing. He advised Mobile Innovations that he had spoken to Cecilia Khoo, Vodafone's affinity manager, and she had arranged a meeting with the Commonwealth Bank (TB 598A-598S at TB 598K; Ogrin para 111; T354.23). 103. Mr Marchbank then raised with Mr Ogrin the possibility of Mobile Innovations direct marketing to Vodafone's affinity partners in a letter dated 25 May 2000 (Marchbank 22/5/02 para 114; TB 596-598). Mr Marchbank noted that the most potential lay in untapped existing relationships that Vodafone had (Commonwealth Bank and American Express) as well as Vodafone's corporate customer base. Mr Marchbank forecast that these types of offers should generate a further 1500 connections per month (TB 597). 104. Mr Ogrin responded enthusiastically in two letters dated 2 and 7 June 2000 (7B601-604; Marchbank 22/5/02 para 114; Ogrin para 114(a); TB 604A-604B; Ogrin para 114(b)). In the earlier letter Mr Ogrin noted that Vodafone had a strategic partnership with the Commonwealth Bank. In his letter dated 7 June 2000, Mr Ogrin stated that Vodafone would offer its " best endeavours to Mobile Innovations to partner programs that possibly could yield up to or exceeding 2000 new connections per month moving forward." Mr Ogrin attached a table forecasting the amount of connections Vodafone anticipated to achieve through the affinity channel as follows: Jul Aug Sep Oct Nov Dec Jan Feb Mar 500 1000 2000 2500 3000 3000 1000 2000 3000 (Marchbank 22/5/02 para 114; Ogrin para 114(b) TB 604A-604B at 7B604A). Affinity marketing during the June 2001 Quarter 105. On 28 February 2001, Mr Marchbank attended a meeting with Mr Brown, Mr Stormon and Mr Ogrin (Marchbank 22/5/02 para 89). He subsequently summarised the meeting in a letter to Mr Brown (Marchbank 22/5/02 para 90, TB76). During the meeting he was advised that Vodafone expected Mobile Innovations to connect no more than 12,000 connections over the following 12 months and " those customers are likely to come from Affinity programs conducted on Vodafone's behalf ." The letter also notes that Mobile Innovations advised Vodafone that the company should identify the affinity programs because opportunities identified by Mobile Innovations had not been embraced (TB767). 106. On 5 April 2001, the business plan for the June 2001 quarter was agreed. It provided for the proposed acquisition of 450 customers through affinity marketing using the Vodafone Direct plan (Marchbank 22/5/02 para 109; TB 941). 107. Both Mobile Innovations and Vodafone considered that affinity marketing was an essential tool in obtaining higher spend customers (Blake at T885.35). 108. In preparation for the June 2001 business plan, Ms Statham had a number of conversations with Ms Khoo, Mr Ogrin and Mr Wisbey noting that "Vodafone has more clout as a brand than Mobile Innovations and we are going to need Vodafone to go out and obtain more affinity partners if we are going to make the numbers" . In response, the Vodafone team stated that they were going to put some programs in place to acquire more partners and they would report to her. As at 5 April 2001, the only Vodafone affinity programs in contemplation were NRMA, Bankers Trust and American Express (Statham 2/9/02 paras 33 and 34). 109. Ms Khoo and Ms Statham also had several meetings with management at the Commonwealth Bank. Several advertising campaigns were implemented targeting Commonwealth Bank customers. However, these campaigns were not successful. In 2001, 3 net sales were achieved (TB 699AA; Statham 12/2/03 para 5(p)). These sales did not become connections (Stonell para 57). 110. Between March and June 2001, there was correspondence between Mobile Innovations and Vodafone attempting to organise affinity programs and the Vodafone Direct plan to be offered in those programs. 111. In relation to a proposed affinity program to NRMA customers, on 6 March 2001 Ms Lees of Mobile Innovations requested Mr Wisbey of Vodafone to provide information on the marketing plan. She noted that the marketing plan was supposed to be offered in March and she still had not seen it (TB 838; Marchbank 22/5/02 para 117). Ms Lees followed up with Mr Stormon on 19 March 2001 (TB 838 para 117). Subsequently, Ms Karpes of Vodafone advised Ms Lees that the offer would have to be an M17 plan as opposed to a Vodafone Direct offer (TB 859 para 117). 112. Another marketing offer that Mobile Innovations tried to achieve was an offer to Bankers Trust customers. On 6 March 2001, Ms Lees sought details of the offer from Mr Wisbey. She subsequently sought details of the necessary creatives on 19 March 2001 from Mr Stormon (TB 840 para 117). On 22 March 2001, Ms Karpes advised Ms Lees that the proposed offer to the bank would be MI branded (TB 868 para 117). 113. In May 2001, Ms Statham attempted to facilitate an affinity marketing plan for campaigners involved in political campaigns (TB 975). She also did the same in relation to a Diner's Club promotion (TB 980). Ms Kenny sought information from Mr Stormon in relation to a planned affinity marketing campaign to Double Day on 14 May 2001 (TB1007; Marchbank 22/5/02 para 117) 114. In about mid June 2001, Ms Statham met with Ms Karpes to discuss Vodafone's affinity programs for the June 2001 quarter. Ms Karpes advised her that Vodafone was unlikely to come up with any new affinity partners for that quarter (Statham 2/9/02 para 36). 115. To facilitate more programs, Ms Statham attempted to obtain Vodafone's approval for affinity programs in relation to the "Best Friend promotion" and to "Diner's Club" customers (TB 975 and TB 980; Statham 2/9/02 paras 33 to 35 Insert A). 116. During the June 2001 quarter, the only affinity programs that were run were Bankers Trust and NRMA (Statham 2/9/02 paras 35 and 37, TB1010). These achieved only four sales (TB 699AA). No affinity sales were achieved using Vodafone Direct (Stonell para 57)…. E. Connections during the June quarter 134. During the June 2001 quarter: (a) no $15 plan sales were made (b) only 5 Vodafone Direct promotions were carried out - no sales were achieved as a result of these promotions (Statham 2/9/02 para 30(b)), although 334 customers were connected to Vodafone Direct plans because they requested that they be connected to Vodafone (Stonell para 58). (c) the only affinity programs that were run were Bankers Trust and NRMA (Statham 2/9/02 paras 35 and 37, TB1010) which achieved only four sales (TB 699AA). No affinity connections were achieved using Vodafone Direct (Stonell para 57). 135. The following is a table showing the subscribers connected during the June 2001 Quarter to MI's billing system (Stonell para 57). Plan Target Actual Vodafone Direct (TB939-941, 945) Connections Connections M!9 5,300 4,227 3 M!11 6,050 4,539 0 M!15 1,500 0 0 MC17 500 925 218 MC33+ 350 521 65 V/D Affinity 450 0 0 V.mobile 0 70 0 Other 0 269 48 TOTAL 14,150 10,551 334 838 To my mind this claim is to be regarded as no more than simply a subset of the parties obligations to put into place agreements which they may have reached under the ASP as part of the working mechanisms in respect of which they agreed to cooperate by doing everything reasonably required to give effect to, for example as here, a business plan which had been agreed to. So much it seems to me can very arguably be read into clause 43 of the ASP obliging each party to "take all steps, execute all documents and do everything reasonably required by any other party to give effect to any of the transactions contemplated by this Agreement". Even if that not be so, it seems to me that the agreement was necessarily implicit: Secured Income supra 839 The courts findings are that the June business plan was agreed to on 6 April 2001; that the $15 Plan, Vodafone Direct and affinity programs to be provided by Vodafone were elements of that business plan and that Vodafone failed to do everything reasonably required by it to give effect to the transactions contemplated by that plan. 840 Clearly on the above evidence Vodafone it shown to have breached the implied term by failing to provide the $15 Plan, by failing to provide branding guidelines for the use of the Vodafone Direct brand and by failure to provide Mobile with information on Vodafone's Affinity programs. 841 This is not to suggest that Vodafone was not entitled to determine the tariff or to change the tariff. However that entitlement [Clause 7.4] obliged Vodafone to use its best endeavours to give Mobile reasonable notice and [Clause 8.1] obliged Vodafone to consult with Mobile as appropriate. 842 What one has here in terms of the established evidence was no more and no less than a failure by Vodafone to follow through on the parameters of a business plan which had been agreed upon without any reasonable excuse, and in circumstances where its past conduct clearly showed a disregard for Mobile's continued regular exercise of its rights under the ASP. Damages 843 In terms of causation and damages it seems to me that Mobile has made good its claim to the loss of its chance to obtain the BAM and the CTM on 2296 loss subscribers [ie 1,500 + 450 + 350 – 4]. Once the modelling is revisited to provide the relevant figure it should be further reduced by a discount of 10 percent for vicissitudes, there being no certainty that the targets would be met. 844 I have given close consideration to the possibility that notwithstanding the extent to which Vodafone chopped and changed during this period of time, the evidence may be thought to disclose that at an "operational level", the parties should be seen to have simply agreed during the quarter, to reallocate the funds and targets applicable to the $15 Plan in the regional CTA Worksheet between the $11 and $17 plans. A close examination of the evidence however satisfies me that Mobile was given no alternative but to go along with whatever Vodafone was prepared to provide, bearing in mind the relevant timeline into the June quarter. That is not the language of consensus. It is the language of being held to ransom. Claim 5 - September 2001 Quarter dispute 845 The central issues raised in relation to this claim appear to be: · whether there was an agreed CTA Worksheet for the quarter; · questions concerning the $15 Plan, affinity programs and Vodafone Direct branding guidelines; and · whether Vodafone was liable to reimburse Mobile for its redundancy costs. No agreed CTA 846 Vodafone contends that there was an agreed CTA Worksheet for the September 2001 quarter with a target of 9,000 connections. Mobile actually achieved 1,509 connections in the quarter, which was the basis upon which the BAM was calculated and paid by Vodafone to Mobile. 847 Mobile disputes that any target was agreed and alleges that it was entitled to be paid the full BAM on 12,000 connections pursuant to clause 18.3 of the ASP Agreement. 848 In my view the evidence establishes that there was no agreed CTA Worksheet for the quarter. It is unnecessary in this regard to repeat the detailed evidence to be found in Exhibit XX. Suffice it to say that : · clearly Vodafone advised Mobile on 14 May 2001 of the connection volumes for the September quarter [7/ 1006]; · on 28 May 2001 Mobile sent the proposed CTA Worksheet for the quarter which included an allowance of $300,000 for redundancies [7/ 1064-6]; · the meeting of 5 June 2001 between the parties and the e-mail from Vodafone of 6 June 2001 reflects the continued disagreement in terms of whether or not redundancies were to be included in the estimated CTA · this disagreement continued through the 14 June 2001 the e-mail from Mr Marchbank to Vodafone [7/ 1112] and through Mr Marchbank's e-mail to Vodafone of 18 June 2001 [7/ 1143]; · the matter remained unresolved through the forwarding of the revised CTA Worksheet on 18 June 2001 [7/ 1153] and the letter of 20 June 2001 from Mr Townsend to Mobile [7/ 1174]. Mr Townsend made plain in this letter that redundancies should not be included in the CTA; · Mobile's responsive letter of 26 June 2001 made clear that its approval of the September quarter CTA was contingent upon the resolution of operational marketing matters relating to the new $15 Plan and other matters. Likewise it made clear that Vodafone was liable for redundancies as a consequence of its reduction in Mobile's connection levels; · the matter which separated the parties in terms of each maintaining a diametrically opposite position in terms of whether the approval of the September CTA was contingent inter alia upon operational marketing matters being resolved in good time was again made explicit on 5 July 2001 [7/ 1205]; · on 13 July 2001 Mobile by letter maintained that no agreement was in place for the September CTA and notified a dispute in relation to the September CTA in accordance with clause 32.1 of the ASP . Mobile repeated that its approval for the September quarter CTA was conditional upon Vodafone "following through on the marketing assumptions made within that plan in a timely way and on a concurrent agreement in relation to redundancies." 849 Mr Bathurst submitted that in determining whether or not the parties had agreed, within the meaning of the ASP, upon a CTA [as earlier explained the term "CTA" was treated by the parties as synonymous for relevant purposes with "Business Plan"], it was necessary for the court to consider the issue in the way in which businessmen would have considered it, that is to say without looking at the matter in terms of a search for a formal offer and acceptance and the like. Whilst I can certainly accept that the Court does not expect the language of contract in terms of offer and acceptance to be used, in my view the parties cannot be seen to have an agreed upon a CTA where an important parameter of that CTA was explicitly simply not agreed upon and raised in almost every relevant communication. That is what occurred here. This conclusion is supported by the inability of the parties to contemporaneously identify or thumbnail sketch how they could or would treat with the disagreement on redundancies as they went into the future. The short position recognized by the parties was that the CTA could not operate in the terms in which it was required to operate, in the absence of agreement on this item. 850 The conclusion that no CTA had been agreed upon carries within it the further finding that Vodafone's refusal [7/ 1226] to accept that the dispute resolution procedure had been enlivened, and to participate in that proceeding, constituted a breach of the ASP. Redundancies - the construction issue 851 The definition of "Actual Acquisition Costs" includes direct and indirect costs incurred in providing the Acquisition Services. These comprise Mobile's total overhead costs allocated on a percentage basis (Schedule 3 (TB198)). 852 The template CTA Worksheet which forms part of Schedule 3 to the ASP contained no express provision for redundancy costs [1/ 199]. I accept that the exercise of making employees redundant could not be said in any logical way to involve the "acquisition and connection of new subscribers" to Vodafone's network. [cf the definition of "Acquisition Services" under the ASP (1/ 134)] 853 The parties will be invited to address submissions as to the way forward in terms of the above findings. Retention Funding - Claim 8 854 During the course of the final hearing Mobile abandoned the claim which it originally advanced to the effect that an oral agreement had been reached between the parties that Vodafone would provide Mobile with retention funding to enable Mobile to undertake retention activities and handset upgrades. [Summons Paragraph 20] 855 Mobile however continued to press its claim that in particular the breaches of contract comprised by the nil target regime, led to Mobile's losing a valuable chance of commercial benefit. The lost chance is said to be the clear prospect that had: · Vodafone honoured its contractual obligations and determined to and in fact set targets for the December 2001 and following quarters; · proceeded to endeavour to agree upon business plans with Mobile. based upon the historic relationship between the parties there is no doubt that Vodafone would have continued to provide retention funding at some level. And this notwithstanding that Vodafone had no contractual obligation to provide such funding. 856 Mobile's further claim proceeds to assert that Mobile is entitled to the lost future CTM for the customers it would have retained if Vodafone had continued to provide retention funding. The loss of retention funding is said to have affected Mobile's ability to retain customers other than those not on plans. 857 In my view it is likely that retention funding at some level would have been provided had the nil target regime not been imposed. However all things considered this matter does seem to me to fall within Deane J's description: "the nature of what would have been obtained…is so completely speculative that it is quite impossible to place any value upon it." [ Commonwealth v Amann at 126] Hence the claim to any more than nominal damages on this head fails. Web site Agreement - Claim 11 858 The only live issue effectively raised in relation to this claim by Mobile which was described early in the judgment, is as to whether or not staff salaries and costs of the installing a second firewall may be regarded as properly subsumed with in the description "hosting and communication costs" within the meaning of clause 5 of the 8 March 2000 Heads of Agreement [3/ 549]. Staff Salaries 859 In my view upon the proper construction of the Website Agreement, staff salaries attributable to the time periods spent by Mobile employees on the relevant Website are to be regarded as included within the ambit of "hosting and communication costs for the portal". Upon the proper construction of clause 5 of the Web site Agreement the words "hosting and communication costs" encompasses a full reimbursement by Vodafone, of Mobile's out-of-pocket expenses in operating the portal. Nothing in the cross-examination of Mr Ikeda affects this position. The issue is one of construction. Security Costs 860 Likewise the same expression extends to include the security costs claimed by Mobile. 861 It will be necessary for the parties to confer in terms of the final amount which Mobile is to receive as part of the judgment in terms of the Website Agreement. Direct marketing (X4 and HIA) Dispute - Claim 9 862 The issue which arises was described early in the judgment [cf paragraph 96 et seq]. Essentially the matters raised for consideration are: · what are the nature of Mobile's exclusivity rights; · whether Vodafone has engaged in any conduct in breach of those rights; · what damage, if any, has resulted from the alleged breaches. The issue was litigated by both parties without any relevant distinction being drawn between the three defendant entities and is addressed accordingly. The relevant clauses in the ASP 863 The relevant clauses in the ASP appear to be the following: · Clause 2.3 provides that: "Subject to any specific provision of this Agreement to the contrary (including Clauses 2.7 and 2.8), MI acknowledges that any Group Member may do or authorise any person to do any of the following at any time: (a) market, promote, distribute or sell the Mobile Services; or (b) anything which MI's obliged to authorise to do under this Agreement, including where such activities are in competition with the performance of MI's obligations, or the conduct by MI of activities authorised, under this Agreement." · Clause 2.7 provides that: "Vodafone will not, and will procure that no Group Member will, during the Term appoint, or deal with, either directly or indirectly, any new Service Provider, or any existing Service Provider which is a Group Member, which conducts a Mobile Direct Marketing Operation in competition with MI." · "Group Member" is defined to mean a: "member of the Vodafone Group and includes Vodafone and Vodafone Billing Services." · "Vodafone Group" means: "Vodafone and each of its Related Bodies Corporate and includes Vodafone Billing Services". · "Service Provider" means: "a person who acquires, manages and supports principally post-pay mobile telephone service subscribers for a period as determined by their subscriber contract." · "Mobile Direct Marketing Operation" is defined to mean: "the acquisition of subscribers to mobile telecommunication services solely by means of remote selling specifically where advertisements are placed in press, magazines and catalogues or direct mail and customer orders are received centrally by telephone, fax, email or the Internet or as may be agreed between the parties from time to time." The nature of Mobile's exclusivity rights Use of the word "solely" in the definition of "Mobile Direct Marketing Operation" 864 Attention has been focused by Vodafone on the use of the word "solely" in the definition of "Mobile Direct Marketing Operation". The contention is that a Mobile Direct Marketing Operation only exists if the operator is doing that and nothing else. In short the contention by Vodafone is that clause 2.7 is limited in its application inter alia to where remote selling is the sole means by which the service provider acquires mobile telephone subscribers. 865 I accept as of substance the submission by Mobile that Vodafone's construction is incorrect for the following reasons: · the word "solely", grammatically qualifies the words "acquisition of subscribers" namely by "remote selling" which is an acquisition technique relying "solely" on responses to advertisements and is effected by means of "orders received centrally by telephone, fax, email or the Internet". The word "solely" does not have any bearing on some other operation which may perchance be carried on by some other service provider.; · the exclusivity given to Mobile, which is a critical part of the arrangement, would be worthless because the new service provider could have some other business (not even telephony related) alongside its direct mobile operation and would, on this construction, not be covered; · the construction contended for by Vodafone would make clause 2.7 ambulatory. A competitor may be carrying on the same operation one day in breach of the one provision and the next day not in breach because it whimsically does something else on the next day. 866 Vodafone Pty Ltd has entered into relevant contractual relationships with X4 Pty Ltd ["X4"] and with the Housing Industry Association Limited ["Housing Industry"]. So much is clear from: · the 30 June 2000 Vodafone Exclusive Dealer Agreement between Vodafone Pty Ltd and X4 [604 J-AA]; Affidavit Ms Blake 4 December 2002 paragraphs 275-276]; · the 3 September 2002 Vodafone Exclusive Dealer Terms and Conditions Agreement between Vodafone Pty Ltd and Housing Industry: [Annexure "C", Affidavit Ms Blake 24th February 2003; cf Affidavit paragraphs 19, 20]. 867 Vodafone has also carried out its own promotional activities which Mobile submits make clear that Vodafone has itself established a Mobile Direct marketing Operation in breach of clause 2.7. X4 and the Housing Commission 868 Mobile submits and I accept that on the evidence presently adduced in relation to this claim and before the court: · Vodafone has clearly appointed and is clearly dealing with both X4 and the Housing Commission [see the above described agreements]; · X4 and the Housing Commission have contracted to and are acquiring subscribers for Vodafone by direct marketing [see the above described agreements and paragraphs in Ms Blake's affidavits]; · X4 and the Housing Commission: - sell hardware as sellers in their own right, - facilitate connections between the customer and Vodafone [the contractual relationship is entered into between the customer and Vodafone, these dealers acting as Vodafone's agent in this regard] [see the above described agreements and paragraphs in Ms Blake's affidavits; see also PX 7/ 1242] Direct Marketing by Vodafone 869 Mobile has outlined the evidentiary basis for this allegation as follows: · In November 2002, Vodafone launched a campaign to attract customers to its Business Choice Plans utilising, amongst other things, direct marketing. (Mr Tales 10/02/03 at para 24). In furtherance of this campaign, an email was sent by Vodafone to Ms England and Mr Tales, dated 11 November 2002, attaching details of the campaign (TB1330Z(xv) – TB1330Z(xxx)). At TB1330Z(xx) and TB1330Z(xxi) of the email, Vodafone referred to the use of "Direct Mail" to potential and existing customers and the use of "Direct Sales Tools" in the campaign. It also referred to a series of off the page promotions, including advertising in national papers. · An example of a "remote selling" letter sent to potential subscribers (and in this case a subscriber acquired by Mobile Innovations) may be found at TB1330Z(xiv). · Further, in the promotional newsletter included in the email referred to in the preceding paragraph (at TB1330Z(xviii)), Vodafone advised that it was employing what is known in the industry as a "member get member" scheme, a direct marketing tool. The tool works by Vodafone encouraging subscribers to facilitate further connections to Vodafone. It involves direct marketing because Vodafone can acquire a new subscriber when that subscriber responds to the invitation by calling an identified central telephone number (Tales 10/02/03 at para 25). · Mr Jones (who was not cross examined) contacted the telephone number displayed in the advertisement in the 11 November 2002 edition of the Age (referred to at TB1330Z(xxi)) of the campaign document. He was advised that if he was an existing customer of Vodafone he could purchase a new phone directly from Vodafone but if he was not an existing customer he would have to purchase a phone using "No Plans" and subsequently upgrade to a "Business Choice Plan". When asked whether that invitation could be put in writing he was advised "that could only be done if you were an existing customer of Vodafone. I suggest it would be easier for you to either visit the Vodafone website or visit a Vodafone store to activate a new account. After you have done that, call the 1800 to upgrade to the Business Choice Plan". [Mr Jones 13/02/03 at para 4] Dealing with the matter 870 It does not seem to me that properly construed clause 2.7 grants complete exclusivity to Mobile in the field of direct marketing. Vodafone itself is not proscribed from conducting that activity. The clause does however proscribe the conduct of the relevant activity by Vodafone when acting through or in conjunction with agents. This construction is consistent with the nature of the ASP and takes into account the exclusivity covenant binding Mobile [clause 2.2]. 871 Clearly clause 2.7 prevents Vodafone itself from appointing or dealing, directly or indirectly, with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with Mobile. 872 Clearly clause 2.7 also extends to oblige Vodafone to procure that no Group Member appoints or deals, directly or indirectly, with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with Mobile. 873 In my view although clause 2.7 is not as elegantly drafted as it might have been, properly construed it is not intended to proscribe the activities of Vodafone in circumstances where it acts itself, as opposed to where it acts wholly or partly through an agent in conducting the relevant activity. Hence the clause can be seen to preclude Vodafone itself from conducting a Mobile Direct Marketing Operation in competition with Mobile. So much appears to have been conceded by Vodafone: "Clause 2.7 prevents Vodafone… from in effect itself establishing a Mobile Direct Marketing Operation" [Final submissions paragraph 32] 874 Vodafone focuses on the complaints concerning X4 and the Housing Commission putting the propositions that: · clause 2.7 is limited in its application to circumstances where the entity conducting the direct marketing is a "Service Provider", which not only acquires but also manages customers · Vodafone is not in breach of this clause if it: - appoints a dealer as its agent to acquire the relevant customers, - then manages and supports those customers itself. 875 This construction is rejected for the reasons already given. Vodafone is precluded from conducting a Mobile Direct Marketing Operation where the relevant activity is carried on by Vodafone in conjunction with an agent. 876 In short [leaving to the side Vodafone's obligations to procure that no Group Member will engage in particular conduct] clause 2.7 properly construed: · precludes Vodafone when acting partly through its agents, from conducting a Mobile Direct Marketing Operation in competition with Mobile; · does not preclude Vodafone when only acting itself, from conducting a Mobile Direct Marketing Operation in competition with Mobile; 877 In the result Vodafone is not precluded by clause 2.7 from promoting its plans by itself placing newspaper advertisements, conducting mail outs or contacting its existing customers by text messages. 878 In the result insofar as the activities of X4 and the Housing Commission are focused upon, Vodafone is shown to have breached clause 2.7 in and to the extent that it has been shown to have acted partly through its agents in the conduct of a Mobile Direct Marketing Operation in competition with Mobile. 879 Insofar as Vodafone's other promotional activities are focused upon, it seems to me that the parties should be granted leave to further address on whether or not the evidence before the court in fact establishes that those activities which are complained of, involved Vodafone's acting through an agent. The matter was not the subject of specific focus through final address Relief 880 The parties will be given an opportunity to address on relief. Repudiation [Claim 10] 881 The claim to relief in terms of a declaration as to repudiation has not been made out. Of vital significance to this decision of the following matters: · Mobile has and continues to receive benefits under the ASP; · The benefits have been the receipt of the payment of moneys by way of the minimum BAM and the CTM payments (Sargent v. ASL Developments Ltd (1974) 131 CLR 634, Immer No. 145) Pty Ltd v. Uniting Church in Australia Property Trust (NSW) (1992) 182 CLR 26); · Mobile has also continued to receive the benefit of the Look Mobile 15 August 2000 ASP Amendment Agreement [cf Mobile's Annual Report to 30 June 2001 9/ 1622 at 1626]. 882 In any event it would clearly be inappropriate for the court to make a declaration in these proceedings at this time because the parties are not agreed on the consequences which would flow from such a declaration and for the reasons given in the following passage from Neeta v Philips (1974) 131 CLR 286 at 307 in the judgment of Barwick CJ and Jacobs J: "Unless the parties are agreed on the consequences which flow from a declaration that such a contract has or has not been validly rescinded it is generally undesirable that a court should so declare without any orders for consequential relief. If a party to such a contract claims that a contract has not been validly rescinded such a judicial declaration is proper if that party continues ready and willing at the conclusion of the litigation to perform the contract. A consequence of the declaration should be that the party submit to the performance of the contract on his part and to an order for specific performance of the contract if that is appropriate. If such an order is not or cannot be made nor an inquiry to damages ordered then a declaration that on a certain day the contract has not been validly rescinded serves no purpose in the litigation. Before such a declaration is made the party seeking the declaration may already have elected to treat the other party's purposed rescission as a repudiation and may have himself rescinded the contract. All that has then been achieved is an issue estoppel if and when the claim for damages for breach of contract is pursued in other proceedings." 883 Whilst the court has determined not to give any relief in terms of a declaration as to repudiation, the judgment in many places includes findings of repudiatory conduct as this is relevant to many of the disparate issues being litigated. It is convenient to set out in one place a number of the circumstances constituting Vodafone's repudiary conduct and I proceed to do so, generally accepting Mobile's submissions in this regard: · Vodafone's conduct commencing on 28 February 2001 and the letter of 7 March 2001 (TB775); · the setting of a nil target for the December 2001 quarter; · a statement on 2 August 2001 by Mr Maher, the Managing Director of Vodafone Plc's operations in Australia, that all future targets would be set at nil; · the setting of nil targets for the March and June 2002 quarters and the failure to set a target for the September and December 2002 and March 2003 quarters. Short Minutes of Order and further address 884 The Judgment covers many areas in complex proceedings with many issues. From time to time in the course of the Judgment reference is made to matters which may require further address. As was foreshadowed at various times during the hearing, the complex and interrelated questions of modelling, damages and relief will in some areas plainly now require some further attention. The parties have the benefit of these reasons to assist in this regard. 885 The parties are also given leave to address further submissions on any particular claim which it may be suggested was not dealt with. The matter will be listed for the purpose of any such submissions being taken at the same time as short minutes of order to be drafted by the parties are to be examined and costs argued. I certify that paragraphs 1 - 885 and appendices "A" to "H" are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on Thursday 27 March 2003 ___________________ Susan Piggott Associate 27 March 2003 Last Modified: 03/28/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.